BW Communities

'We Are Restructuring Edelweiss' Business Model'

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Looking back, Rashesh Shah's aspirations of making Edelweiss India's Goldman Sachs seem like a slightly distant dream (Goldman Sachs itself is here anyway). "Things change," he says; and how they have changed. The financial services industry wields the most influence on our stockmarkets. In an interview with Businessworld's Srikanth Srinivas, Shah acknowledges that banks are a big part of that. Excerpts:    After a spectacular opening, Edelweiss stock hasn't done particularly well. Why do you think the market has taken that view? What do your investors think? Stock price is always a tricky one. Ideally you should offer an IPO in the middle of a growth phase, so that you have demonstrated growth behind and created headroom for more growth. After our IPO, the world got hit by a huge credit crisis. Until then, the entire financial services sector was enjoying 50-60 per cent growth and most of us conservatively expected a 20-30 per cent growth to follow. But things changed after 2008. I think the Indian capital market business — scale and profitability — has not come back post the crisis. The current activity levels and profit pools are half to one third of 2007-8. Secondly, we have embarked on a process of restructuring of Edelweiss' business model — from a capital market company to a broad based financial services company. This has required investments, which will produce results in the future. Going retail is a big shift, even a risky one under the circumstances. What's the rationale for this strategy? The simple answer is that's where the next big opportunity, and it's a really big one. Imagine the total financial savings — roughly $400 billion a year - as being poured into the mouth of the funnel; think of large savings going in and large investments resulting from these. What comes out of the stem at the bottom as the pool of financial products? The $400 billion that is poured into the funnel goes through a series of pipes: products and services such as bank deposits, insurance, mutual funds etc. Going retail would involve focusing on the amounts that go into the mouth of the funnel, and the pipes through which they flow through to the bottom of the stem. That's a different scale, and a hugely different set of opportunities. That's what we are aiming for when we go retail; the next big growth opportunity or set of opportunities is there. That's why we are going into retail broking, insurance, housing finance, etc.   Financial services companies like yours may have started off at different points, but almost all of them are building businesses along the lines you are. What makes yours different? You are right; financial services can be, and are being, commoditised. A firm creates a product, and very soon, others imitate and copy it. The same is true of services; what one bank offers, for instance, is almost identical to what others offer. Businesses - asset management, insurance, housing finance - have the same economics, even if they have different business models. So the replicability of such businesses is a given. Or in other words, product differentiation is not the only answer. But take a look at GE, or IBM: what makes them different is the organisation; that is what makes them the brand they are, that's why there is only one GE in the world, and one IBM. Organisational differentiation is the hardest thing to do: it's a combination of values, mission, business ethics and the way you conduct your business. That's what I —and my senior-most management team — spend lots of time on: how do we build Edelweiss one of the trusted brands among financial services organisations?   Sooner or later, banks will probably end up having the lion's share of all the other the financial services business as well. How do you think the non-banking financial companies (NBFCs) and others respond? Currently if you look at revenue pools, banks are approximately 75 per cent of financial services; the other 25 percent a combination of NBFCs, insurance companies and capital market players. I don't think the 75:25 ratio will change significantly in the next 5-10 years. One reason is that banks still have a long runway to expand the reach of banking products for the next 10 years. A 25 per cent pool of a growing financial services market is not small. A GDP growth of 8-9 per cent and a savings rate of 33-35 per cent means that by 2020, our financial savings would be four times what we as Indians have saved in the last 40 years. So the size is enormous and will have enough room for all forms of financial services - from banks, NBFCs, Insurance companies to MFs to grow. Given your approach - creating the holding company structure, for example — is seeking a bank license the next step? A holding company in financial services is inevitable for a broad based player. As I said before, we are in the process of restructuring our business model. Currently, we are investing in our housing and life insurance businesses. This will keep us busy for the next 2-3 years, and it may not be prudent to change the business model again so suddenly. But banking is a good and large business opportunity, and every financial services firm which wants to grow, have breadth and scale will look at banking at some point; the key is doing it at the right time.