THE GOVERNMENT OF INDIA'S BORROWINGS, as at the end of last fiscal, stood at a staggering Rs 31 lakh crore. The amount would be still higher at the end of current year. But if you look at the figure differently, as a proportion of GDP for instance, it would not look all that ominous. Consider that the USA with more than 25 times the debt size of our country has the same debt to GDP ratio. Some would even argue that government needs to raise more debt, looking at the plight of a large number of BPL families and the pathetic state of our infrastructure.

Similarly, the often quoted figure of Rs 14,500 crore as commission being paid by the insurance industry would appear not too high if one reckons the fact that the commission is in respect of 25 crore policies and over Rs. 2 lakh crore of premium collected by the industry. For a saner view, one should also consider that huge amount has been invested under insurance plans with upfront commissions of 1.75 to 2%. Therefore, the theory that 40% upfront commission is being paid across the board is patently wrong.

Distribution has always been a critical factor of the production chain. Reaching products of manufacturers to ultimate customers is a big challenge. The creation of distribution network costs money and resources. The ability of companies like ITC and Hindustan Lever to market products efficiently lies in their strength in distribution. Distribution plays an even more important role in financial services. Do we need to be apologetic about the costs of reaching customers in a country of our size and complexities?

The adoption of low-cost model of New Pension Scheme and the 'load free structure' of mutual funds has triggered this debate. NPS has recently started operating and so far the corpus comprises of funds diverted from provident funds. There is negligible retail or voluntary subscription. Already, the fund is asking for subsidy from the government. Is it not too early to use it as a model that can be extended to other sectors considering that voluntary pensions like life insurance is a pull product?

Sebi has withdrawn entry load from the mutual fund schemes. The commission will have to be negotiated by the investors with intermediaries and paid to them directly. There are also reports that some section of distributors have agreed to collect 1.25% commission (including sub broker fees). The exit charges have been raised by most MFs on investors under the existing schemes who had entered the schemes paying full load, immediately after the Sebi announcement. Is it in keeping with the spirit of changes made by the regulator? Is the structure actually load-free?

Let us look at the composition of funds under management with MFs. Bulk of these funds are corporate funds. In a recent article Mr. Pratep Kar, former member at Sebi has stated that corporate funds account for 80% of AUM s of mutual funds. Retail funds were Rs 79,756 crore as at end of last fiscal. Compare it with AUMs of life insurance industry which has assets of over Rs 9,30,000 crore mostly retail and total premium of Rupees 2, 20,000 crore in 2008-09 alone. Major players in MFs like UTI had given a tough challenge to LIC not more than a decade ago when AUM of UTI was almost equal to that of LIC eight years it's senior. What has since happened to cause such a difference in retail base? According to Mr. Kar, with the number of corporate and high net-worth investors being much less, "it is always more economical to service them. So logic would dictate that the fund houses would be more diligent and attentive to the 80% group than to the 20% group."

Mutual funds have seen a drop in the collections since the introduction of the new form of compensation. Efficacy of this model needs to be established at least in an industry with very little retail focus before it can be extended to a totally retail-based industry with 30 crore retail policies being serviced by 11,720 offices, 70% of these being located in rural and semi-urban areas.

Another factor which is of relevance is the distinctive role of agents in life insurance where their role goes beyond introducing a product and advising the potential client about its merits and downsides. Agent is the primary underwriter and is part of the risk assessment process which begins with him, giving a report on the health and financial status of the prospective policyholder to the insurance company and then guiding prospective customers about various medical tests and examinations. Disciplinary action has been taken against agents in case of negligence. In case of death claims, he advises the nominees/heirs in completing claim documents especially in case of policyholders dying early. The intermediaries in other financial services have a much restricted role.

One of the recommendations is to create a Self Regualtory Organisation and ensure that all intermediaries go through a common licensing process after vigorous training. The idea is the SRO will also take action against complaints of mis-selling and unprofessional behaviour against intermediaries.

A very laudable thought process. However, one must consider the fact that at present more than 3 million intermediaries are selling financial products many of them being common agents for insurance, pensions, mutual funds, small savings etc. Most of them will come back under the new regime too. Obviously, SRO cannot have too many policemen patrolling and will have to rely on the investors to report cases of mis-selling and unprofessional conduct. For this to happen, financial literacy has to improve. Investor education programme is going to be the key driver for the suggested new order. We ought to take investor education as a focus area. Regulators and the government have a role here. There is no justification for disturbing the set-up of a retail based industry which has contributed immensely to macro economic development. The targeted results could be achieved by adopting greater disclosure in sales process and intensive investor education programme.