Indian middle class – financial services penetration and implications

The ADB report on the rise of the middle class in Asia Pacific has lot of valuable information for the financial institutions in India. It also provides a pointer in the direction of which sectors need to be regulatory helped and which sectors have to be restrained and restricted. The comparison with China helps us in understanding the focus areas in financial services development in India as many of the sectors where in a very similar state 20 years back. The most penetrated segment has been insurance. Regulated by IRDA, it has manifested as a sold good – distribution agents taking the lead to sell it in a FMCG manner. The high ( as compared to other segments in the sector as well as compared to other geographies) means that motivation to sell certain products ( ULIPs) has been very high. While whether these products actually achieve the insurance goals of the buyer is debatable, there is no discussion on the penetration. On an average, the adoption is around 65% in the Indian middle class. With the growth of the middle class, this is a key sector of growth. In sharp contrast, we can see the growth and penetration of other sectors namely Investment trusts and pensions. As the old age population is going to grow, key questions arise – • Should pensions be sold like insurance products in India. • If so, should it be expected from the insurance players to grow the pension market especially in a context where the ULIP business is so lucrative? How PFRDA handles this issue as well as answer the question of increasing pension coverage in a not-so-highly-financially literate population with a large unorganized sector will determine the future of social security in India. Innovative use of traditional channels like post office, tying up with non-governmental sector for awareness building, regulatory parity of commissions across various financial products and policy level changes are all important for this paradigm shift.