http://m.economictimes.com/opinion/comments-analysis/no-need-to-go-physical-simple-financial-products-backed-by-gold-or-real-estate-assets-to-deepen-savings/articleshow/11998812.cms
Practical savings opportunities: Consumers should be offe
red products backed by gold or real estate
23 Feb, 2012, 1305 hrs IST
Alok Kshirsagar & Naveen Tahilyani
Indian households have had high savings, but put more than half into physical assets such as gold and real estate - a significantly higher amount than most other countries. This is understandable as investment returns on physical assets in the past decade have outpaced equity markets.
But there is often a 15-20% gap between perceived and actual rate of return on these assets, given commissions, bid-ask spreads and illiquidity. What"s more, future investments will require very large, lumpy commitments: 3-5 times the levels of a decade ago. The existing preference for physical assets also drives higher trade deficits (via gold imports), and lowers funds available for capital creation.
What are the ways to meet the consumer"s desire to invest in gold and real estate while mitigating the disadvantages of investing in physical assets? A recent McKinsey study, conducted pro bono with the ministry of finance and the Indian Banks" Association to identify practical solutions to these issues, researched over 1,200 consumers across India, assessed different banks, NBFCs and informal sector models such casino nederland as jewellers and builders" savings schemes, and reviewed relevant international practices.
Our findings indicate a substantial opportunity to deepen savings through financial alternatives with lower-ticket sizes, greater liquidity and potential to generate new capital for the country. This could lead to annual flows twice the size of the mutual fund industry and, in the next five years, add more than 1,20,000 crore for infrastructure and priority sector lending. Beyond deepening existing products like mutual funds, there are two types of innovations worth prioritising for financial services firms and policymakers:
Capture new savings flows with simple financial products backed by gold or real estate assets.
Gold ETFs and mutual funds have only tapped a relatively small, trading-oriented customer segment rather than the larger savings-oriented base. New alternatives such as gold accumulation products and gold bonds would work similar to a monthly recurring deposit scheme, with customers ultimately obtaining certificates to purchase gold or receive cash.
If manufacturers (e.g., banks and asset managers) are allowed to back 80% of the assets under management with physical gold and hedge the remainder, this would unlock significant productive capital.
McKinsey"s research showed high willingness among middle- and upper-middle-income customers to consider real estate investment vehicles that delivered stable rental yields from reputed asset managers (rather than current schemes that are designed for wealthy investors interested in capital appreciation on new construction). Both types of products have been successful in markets such as China, Japan, and Singapore, and can be adapted to India.
Arun Gupta
