Financial services industry: Morbid attraction!
I am still wondering (for the past 20 years!) what attracts people to the financial services industry?
All business houses feel the great urge and need to set up an NBFC and then try to grow it to a bank. Not even one has been able to succeed in this (yes I know you are saying Kotak Mahindra bank is an exception, but KMB is a different story).
So you have the Tatas, Birlas, Ambanis, Murugappa, Sundaram, Dlf, Kishor Biyani, ………..the biggest and the best to the wannabes all coming into the financial services industry! The question to ask is why?
Well, maybe it looks glamorous from the outside? I doubt it. It is an overly regulated industry – banking, mutual funds, life and general insurance, broking….all parts of the business are overly regulated, and that is VISIBLE. So it cannot be the glamour like the airline or the hotel industry.
Easy to enter: Yes compared to setting up a factory to manufacture cement or autos this business is easy to set up. Maybe that is one of the reasons?
Easy to start small and then scale up: You need not enter all the businesses at the same time. You can stagger your entry into brokerage, mutual funds, life insurance, general insurance, banking – all of them do not have to happen on day 1.
Good market capitalisation: the financial service industry gets a very good p/e – this increases the market capitalisation immediately! This WAS true for Anil Ambani, but I guess his shares are still not doing too well vis-a-vis what it was earlier. This is OBVIOUSLY because you can talk up a share, but you CANNOT talk up the cash flow that it generates. The market found out, that is all.
The attraction of slow scaling up flies in the face when you see Escorts mutual fund – and even Sundaram mutual fund. Cholamandalam Investments has had a up and down life as an NBFC and only a down and down life as a mutual fund. The Murugappa group surely lost money in the mutual fund business, and cannot be making any serious money in the brokerage business.
The jury is still out on whether the Tatas, Birlas, and L&Ts will make decent money from the financial services business – at least as of now, they are not. At least not making money for the amount of money invested in them.
The weaker players like DLF, Biyani, et al have already packed their bags and run away! Bharti Airtel is in financial services – and are not making too much money for sure…..
So will somebody tell me please? why this fatal attraction for the Money business?
OR am I too dumb to understand that?
Bhushan
Why they want to setup bank??? well, may be the thought that Black money can be easily converted to white (Thanks cobra post). Or that they can divert easy money from bank to their other ventures illegally or at lower interest rates.
NPR
Subra, while Sundaram MF may have iffy funds (except one or two good ones), they have been profitable, though just.
subra
oh NPR what Roce and what Ronw? they would have been more profitable if they had just bought TCS shares and not done any business at all….
Santhanam
Subra Sir,
I agree with Bushan’s points :
// they can divert easy money from bank to their other ventures illegally or at lower interest rates. //
// Black money can be easily converted to white (Thanks cobra post) //
Also i have heard stories(long back…but not sure whether it happens now) in a TN based Bank, the manager will give money in early morning to big/wholesale grocery vendors, the vendors will buy commodities in one market, transport to another market and sell the commodities in that market/retailers and give back the money to the Bank in late evening. All without records. The bank may get a very small fee. I feel that big corporates also thinking of such strategies.
Also if factories runs in to losses, the corporates has to sell the factory & book losses. If Banks runs in to losses, Government will step in and take over the losses/Bank. The risk is lower, but reward is higher.
🙂
kebhari
thanks for this article….
subra
Bhushan and Santhanam
both ur comments are from bank EMPLOYEES point of view, not from promoter point of view.
The people who are seeking a banking license can get these kind of kid stuff without having to set up a bank.
in fact if they do get such things done it will be at 5 levels below the owner’s level…