Chasing India: how private banks are building for NRIs

Asiamoney, May 2012

International private banks are building specialized businesses to service the non-resident Indian segment of the market. They have distinct needs in terms of investment preferences, regulatory considerations, and their own business backgrounds – and, crucially, they are growing fast in both number and wealth.

Pinning down the size of the NRI segment is tricky, and many banks have undertaken their own studies and come out with different answers. We know there are about 25 million people in the Indian diaspora around the world, and that many of them are business owners; Datamonitor has estimated their net worth at US$1 trillion, while the Reserve Bank of India discloses that overseas Indians remit US$46 billion to India each year.

Within this region, HSBC conducted a study in 2011 which calculated there are 2.8 million NRIs in Hong Kong and Asean countries, and about four million in the Middle East (Citi reckons five million in the Middle East, led by the UAE and then Saudi Arabia, and that there are 33,000 high net worth individuals in the UAE alone). UBS estimates that NRI wealth in Asia Pacific and Middle East exceeds Sfr40 billion of invested assets.

Deutsche Bank’s approach is not to look at NRIs in isolation, but what it calls the Global South Asia segment, including Indian, Pakistani and Sri Lankan expatriates, although in practice 85% of that group are NRIs. Sudhir Nemali, who is the deputy head of that business for Deutsche, estimates that the bankable aggregate wealth (for wealth management) among them is between $80 and $100 billion.

NRIs are primarily based in the US, London and Dubai, followed by Hong Kong, East Africa and Singapore, with smaller communities in areas such as in Belgium, Spain, Panama and the Caribbean.

“We break the target market into three distinct categories,” says Nemali. “The first is the old trading community, displaced during the partition process, who have settled in all parts of the world and typically do small trading businesses. That’s the historical mainstay of the NRI wealth management proposition.” The second is professionals: investment bankers and hedge fund managers growing in wealth. “The third and most exciting is the Indian-origin entrepreneurs based overseas, who are looking to build on their knowledge and experience into growing their businesses globally, both organically and through acquisitions.”

Alongside NRI wealth, Indian wealth in-country is another success story. “Four of the top eight billionaires in the world are Indians,” says Hugues Delcourt, CEO for Private Banking Asia at ABN Amro. He says India also has the second fastest growing population of huge net worth individuals in the Asia Pacific region: 153,000 with combined wealth of US$350 billion in financial assets. Within that, 850 individuals are characterized as ultra-high net worth; that is, more than US$30 million in assets.

So, clearly, their wealth is not in doubt. But how to serve it?

“Most NRIs are savvy investors and are well aware of the global financial markets,” says Ajay Kashyap, managing director and global head of NRI Business at Citibank. “Their requirements range from basic rupee savings to global investments,” including stocks, bonds, mutual funds, insurance, currency trading, mortgages and estate planning. Citi is one of many with a discrete business to help them; every bank interviewed in this feature has a dedicated team within wealth management devoted purely to NRI or South Asian wealth.

Vinay Gandhi, managing director at UBS Wealth Management, notes that NRI is a broad term encompassing a wide range of locations, wealth and businesses. “In sketching a profile of NRIs, they are generally very financially astute and invest globally across all major asset classes,” he says. “However, they have a bias towards their home country because of their deep understanding of the local markets,” and because of the roots all people tend to feel to their place of origin.

This fits in with a widespread view: that NRIs fundamentally want the same asset classes as everybody else, just with a twist, usually related to India itself. “Where they differ is in having more appetite for tactical opportunities they are comfortable with, in particular with linkage to India’s credit market,” says Nemali. “They are more opportunistic in terms of ideas, but their product needs are pretty much the standard Asian client template.”

There are some distinct requirements related to the stage of business that many Indian NRIs are at, and this mirrors the Chinese diaspora. “Most NRI Indian families today are in the succession and inheritance planning life stages,” says Rajiv Sodhi, team head of ABN AMro’s NRI desk in Singapore. “The new generation of NRI HNWIs and entrepreneurs are also very open to wealth planning and structuring,” such as the establishment of trusts and foundations.

It’s certainly true that the NRI segment’s needs have changed over time. “The wealth management needs of NRIs have evolved, both in terms of breadth and sophistication,” says Sandeep Sharma, managing director and business head for the Indian Subcontinent at HSBC Private Bank. They have become more internationally mobile, more affluent, and more actively involved in investment, he says. “Their needs have come a long way from the days where an NRI looked to banks mainly to help with routine, timely remittances to India, and a safe place to accumulate hard-earned savings.” Consequently a private banker today has to offer a combination of local (transactional banking, foreign currency, investment property finance, stock trading), India (remittances, retirement home purchase finance, stock trading again) and global needs (international offshore wealth services in centres like Singapore and Hong Kong, or perhaps fund transfers for a child’s education in universities in the US, UK or Australia).

One distinct attribute of this group which plays to the strength of the global private banks is their mobility. “It is not uncommon for NRIs to relocate every few years around the region or globe as their careers advance,” says Sharma. International offshore wealth services mesh with this pattern, since they don’t have to move their wealth every time they move themselves.

One other effect of this mobility is to nurture an interest in particular investments. “Being globally mobile, NRIs are also keen followers of emerging financial trends in various parts of the world,” says Kashyap. This leads to a combination of basic and esoteric needs: ordinary banking products, retirement planning and wealth protection on one side, and “short term tactical opportunities such as currency and options trading” on the other. Kashyap says any wealth management platform for NRIs has to include an efficient remittance channel and a globally competitive investment product suite. “This unique combination sets the wealth management platform for NRIs apart from that of other segments.”

One example of the distinct product needs is a play on interest rates available in India versus elsewhere. “Typically, when you talk about NRI product, you are looking at the interest rate opportunity,” says Nemali. “Overseas bank deposits are tending towards zero; NRI deposits were recently deregulated, and most banks are offering between 8.5 to 9.5% for Indian rupee deposits.” Naturally, there’s a currency risk in that approach – which can be hedged – but in a trend typical of the tactically aware mentality of many NRIs, Nemali says many are happy with that risk. “As the rupee has weakened considerably from its 2007 to 2008 levels, clients are comfortable with running India rupee risk and prefer to take advantage of the high interest rates,” he says. “If you lock in a deposit for five years, you have a 45% buffer to deal with any potential currency movement.”

And it’s not a small amount flowing into these products. “In the last few months, NRI deposits were probably the biggest channel for money raised for NRI-focused private banks and wealth management, and all of those remittances went into India,” Nemali says. “Anecdotally, about US$10 billion of this money was raised.”

Other trends have a lot in common with China. Gandhi at UBS points to “the growing interest in family office setups from entrepreneurial families.” UBS’s own Asia Pacific family office study, conducted with Campden, found that 80% of family offices are still connected to the primary business where the money was first made; Gandhi says that holds true with NRIs as well. “Due to their direct interest in investments in their businesses, they have tended to take an active role in achieving investment returns through their family office.” He’s expecting more family office structures, “as it allows them to maintain multiple banking relationships and manage the entire portfolio properly, rather than consolidating all their assets with a single bank.”

Another area for growth may be discretionary portfolio management services. “We are seeing increasing interest from our globally minded HNWI NRI clients in diversifying their portfolios across Asia and other emerging markets,” says Delcourt. “However, the diverse and relatively under-developed asset markets may not be easy to access via direct investments.” That leads naturally to discretionary portfolios.

One might expect India’s regulatory environment to be a source of work for bankers, but in truth they don’t see it as very restrictive. “We are actually very positive about the regulatory environment,” says Nemali. “We believe there is a lot of emphasis on enhancing transparency, and the regulators have embarked on a policy to make things easier for NRIs and foreigners to invest directly into India.” NRIs can move foreign currency in and the rupee out without a problem, he says, and while there are still some restrictions, the mood today “indicates a continuing liberalizing stance, and that will help the wealth management industry overall.”

ABN Amro has a similar view. “The Reserve Bank of India has plans to make the rupee fully convertible and they have made a fair bit of progress towards this end by gradually increasing the remittance limit for resident Indians to US$200,000 per person,” says Sodhi. “This presents an opportunity to reach out to ultra HNWI in India and to capitalize on this segment when indeed the rupee becomes fully convertible.”

However, changes do arise, and they need to be managed. “With the proposed new direct tax code to be implemented in India by the 2014 financial year, we expect the next biggest need of this segment to be the structuring of wealth holdings,” says Sharma. HSBC has a large international private client trust and estate planning business; again, this seems to be a shift that will benefit the multinationals.

For Kashyap says the challenge is not Indian but global regulation. “Rupee convertibility is not a major concern to NRIs as they are net remitters of wealth into India,” he says, adding that the scale of remittances makes them “the overseas diaspora that is most engaged with its parent country”. Instead, “the overall regulatory environment is becoming challenging for banks all around the world,” he says. This ranges from know your client and anti-money laundering legislation to fair dealing regulation.

Whatever their needs, NRIs will continue to be courted by global banks who see their trajectory as very clearly upwards. “NRIs have established themselves as a globally successful and upwardly mobile group of professionals, senior executives and entrepreneurs,” says Sharma. Furthermore, their offspring – now typically born and raised overseas – are increasingly earning professional degrees at top tier institutions or are rapidly rising executives. “The outlook for their success and accumulation of wealth remains strongly positive, and this forms the key driver for the outright number of wealthy NRIs to grow annually at a rate at least twice the GDP growth of the countries they live and work in.” He estimates wealth creation in this segment will grow at over 15% compound annual growth in the next five to seven years.

As Kashyap says: “The future looks both promising and challenging.”