ACCESS POINT. Mr. Nikhil Kapadia INTERVIEW WITH: Chief Executive Officer Wealth Management, Avendus Capital. By Nikhil Jindal & Gaurav Tewari

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1 ACCESS POINT 100 THE EXECUTIVE ACCESS NEWSLETTER October 2011 INTERVIEW WITH: Mr. Nikhil Kapadia Chief Executive Officer Wealth Management, Avendus Capital. By Nikhil Jindal & Gaurav Tewari

2 At what stage of development is the Private Banking Industry, and how has the industry fared so far in India? Like China, India is currently in the wealth creation mode and based upon various studies there are USD millionaires where a substantial share of the market is still not tapped. Most importantly, a lot of wealth is being created in the services and manufacturing sector where young and budding entrepreneurs raise capital to invest in their businesses. These entrepreneurs have been successful in adding more value and creating even more wealth for themselves. For private banking, India has to be a long term play and would require 5 6 years to establish a mature private banking business. Further, private bankers must ensure that they are able to deliver as per the expectations of the client and therefore building trust, adding value and developing long lasting relationships are critical. Also, it is imperative for private banking firms to have a reliable and high quality pool of talent, variety of products and a business model that makes them relevant in the eyes of their customers. In this context, the Indian wealth management industry will develop with time as it is still in the early stages of evolution. What are the limitations and challenges of the Indian Private Banking platforms? In India, so far there has been a laissez faire approach where the entry barriers to the wealth management business have not been steep and has resulted in several wealth management firms setting up shop. Today, the market per se is perceived to be crowded leading to intense competition amongst private banking firms and therefore profitability is significantly under pressure. On an average, the return on asset in India is about 66 basis points which is slightly below the return on asset in Asia at about 75 basis points. Another major challenge that the wealth management industry faces is a huge trust deficit among clients caused by product mis selling, opaqueness and inexperienced talent pools. With changing dynamics and weak domestic and global sentiments has there been a change in the asset allocation mix, perhaps to alternative investments? From an asset allocation perspective, Asia in general does not have more than 15% of assets allocated to the alternate investments class which may comprise of precious metals such as Gold and Silver, Real Estate, Private Equity Investments and so on and so forth. Till date, majority of the allocations are towards fixed income and equity. However, I believe the increasing appetite for alternate investments in Asia including India is mainly being driven by new wealth which is seeking performance How would the Indian Private Banking sector fare in the next months considering the recent worldwide economic uncertainty? It would be difficult to crystal gaze but I believe the sector will witness a fast maturity process in the Indian markets with both service providers re inventing their business models towards building trust and relevance with their clients and investors increasingly becoming more aggressive in terms of demanding supreme services with alignment of interests based upon investment performance.

3 Recently Government of India has taken tentative steps to regulate the Private Banking Industry in wake of an increase in instances of mis selling in the sector. In your view, does the industry require a tight regulatory body? If yes, in what ways it would be beneficial for the sector? I believe regulation is necessary for the orderly growth of the private banking sector as long as it can ensure that sound practices and processes can be followed which would be beneficial for investors. This would further increase transparency and will be a welcome step for the industry. At the same time, excessive regulation would stifle entrepreneurship and could cap the growth of the sector and one must tread with caution. The concept of family Office has picked up lately in India. How are family offices different from individual private banking services? The concept of family office is clearly misunderstood and is loosely used in India. The primary role of a family office is to provide the best in class of everything for the family be it access to the top fund managers, investment products, expertise in sourcing luxurious goods/services, identifying philanthropic avenues etc. Family offices are a cost centre and therefore are justifiable only when there is a significant size of assets under management. Have regulatory changes in the MF and Insurance industry in any way affected private banking business or the sales pitch? They have ushered in transparency lowering the costs of intermediation to a large extent curtailing malpractices that were prevalent in an industry that is nascent How do you compare the quality of Indian talent vis à vis global talent? If we analyze the ratio of the number of private bankers to the NRI population, the NRI segment seems to be overbanked. While in India, there is a dearth of quality and experienced private bankers. Firms have to continuously deal with the issues of employee retention, productivity and recruitment. This has resulted in high employee costs. End of Interview

4 SNAPSHOT Globally HNWI s financial wealth grew 9.7% in 2010 to reach USD 42.7 Trillion while the global population of HNWIs grew 8.7% to 10.9 million. According to a Capgemini and Merill Lynch Wealth Management Report, the combined wealth of millionaires in the Asia Pacific region will increase 8.8% annually until 2018, compared with a global average of 7.1%. India s HNWI population became the world s twelfth largest in 2010, entering the top 12 for the first time. According to Booz & Co., the HNWI population in India is around while the total HNWI wealth in India is around USD 630 Billion in year In India, around 10% of the total wealth of HNWIs has been tapped by banks and other non banking financial companies. The Breakdown of India s HNWI financial Assets are as follows: Equity 32%; Fixed Income 25%; Cash Deposits 13%; Real Estate 22% and other alternate Investments 8%. 1 Source: Capgemini and Merrill Lynch In 2010, The HNWI population in Asia increased significantly in Hong Kong by 33%; Vietnam 33.1%; Sri Lanka 27.1%; Indonesia 23.8%; Singapore 21.8%; and India 20.8%. 2 According to Boston consulting Group, wealth in India will increase at a CAGR of 18% for the period , faster than 5.9% growth of global wealth to about USD 162 Trillion. 3 According to Delloitte, the number of families with net assets of more than a million dollars would more than double to USD 10 Million in emerging markets including India and China by year Source: Booz & Company Source: Booz & Company 1,2&3 : Capgemini and Merrill Lynch 2010; 2011

5 THE ROAD AHEAD Margins under Pressure: A narrow product range, increasing competition, falling advisory fees and billions of dollars in wealth hidden from tax officials has stifled profits for private bankers. At the same time, Private Banks in India charge between 0 0.5% advisory fees to HNWIs, which barely covers costs for smaller players, compared to about 0.5 2% in more developed markets. The challenge is made greater by poor market performance with the broader indexes falling about 17% this year, expenses mostly salaries growing by as much as 20% annually and the preference for many HNWIs to park their investments in real estate and commodities such as gold and silver has put immense pressure on the margins of the private banking industry. However, in these uncertain times, bankers can mitigate risk by adopting world class processes and practices. The immediate challenge lies not in finding new clients, but rather, is how best to serve the existing clientele. Hence strong global private banks with tried and tested practices and processes will be better placed to succeed. Product Innovation: The Indian private banking is confined with products available only within India and has put the private banking sector at a disadvantage when compared to a private banking client located overseas. Also, many of the richest Indian HNWIs have substantial wealth and do their private banking in countries such as Singapore, Zurich, London or Dubai where there are more investment options and where some banks cater specifically to Non Resident Indians. According to Booz and Company, to succeed India, wealth management firms will need to address the needs of a population that is highly divergent in terms of its language, culture and wealth preservation objectives, establish full fledged advisory models and establish an onshore/offshore presence with local representation to enable both onshore and offshore investments. Regulatory Body: Currently, the services of private banking are largely unregulated, unlike other financial sectors services including broking, mutual funds, insurance and regular banking services. Unregulated wealth management and investment advisory services have grown exponentially, exposing investors to high risks in terms of mis selling in the sector. The government is in discussion with financial regulators to bring in an umbrella act governing the private banking industry. These regulations will bring in a great deal of transparency, help an orderly growth for the wealth management industry and also boost the sentiment of the investor to opt for Private Banking Services.

6 Employee Retention: As Private Banks are expanding aggressively in different regions to build their own brand identity there is one key aspect that all banks have to deal with is recruitment and employee retention. Since there is dearth of experienced bankers needed to manage the fortunes of the High Net worth Individuals, it has become a common practice to poach talent at higher remuneration packages. Without any doubt, continuity is imperative in private banking relationship as it takes time to build comfort level and trust with the client. If the client has to deal with a new banker now and then, it would diminish the client s confidence in the entire set up and the relationship might be lost during the transition. The banks must realize that luring talent is only a short term measure and must take the role of grooming bankers to address the problem in the long run. ABOUT EXECUTIVE ACCESS Executive Access India was setup in 1995 and is today one of the most prominent global executive search firms in India. We cover 9 industry practices and have till date executed more than 1400 search mandates at leadership levels. Our client list is a health mix of Fortune 500 companies as well as most respected Indian corporates. Although a firm with global capability and coverage we are still boutique at heart because we understand the need to be nimble and innovative. Our core strength is undoubtedly our knowledge base and a team of efficient and experienced consultants with in depth understanding of their chosen sectors. We are the pioneers of the Accountability Clause in the Indian retained search and have always striven to align our business model with the needs of our clients. Our services include the following Executive Search Leadership and Board Consulting Executive Intelligence For queries please contact: info@executiveaccess.co.in Executive Access (India) Private Limited, Unit 6, D2, 3rd Floor, Southern Park, Saket District Centre, Saket, New Delhi: Phone No: , delhi@executiveaccess.co.in, Capital Introduction Services