Top management of banks are pressuring their employees to sell insurance, stocks and mutual funds by hook or by crook. No wonder, departing deputy governor of RBI has suggested banning banks from selling third-party products
From the point of view of retail savers, banks are a place where you park your money and get facilities to withdraw, issue cheques and also borrow. But what happens when a bank employee “advises” you to move in and out of stocks, buy a particular insurance product or buy or sell mutual funds? The result is rampant mis-selling, losses and large number of baffled savers.
Here is an email we just got from an Axis Bank employee. “As you are well aware of the practices followed by banks to sell or mis-sell investments products I need not elaborate them. But believe me the pressure, which is applied by the bank’s management throughout the year for selling these products can only be equated to madness. The management puts so much pressure as if without selling these investment products, the bank will not be able to generate any revenues. Moreover, the high percentage of revenues shared by insurance companies during the first year of sales is a major attraction for banks. Almost all banks organise contests within its staff for maximum selling of insurance products, and the rewards include all-paid foreign trips. All expenses, of course, are borne by the insurance companies. In spite of Cobrapost operation, banks have again started these old practices,” said the employee, who does not want to be named.
This mis-selling is not limited only to selling insurance or mutual funds. Some of the banks, which offer broking services, are found many times to misguide its own customers. Take for example, this investor who has a trading account with Axis Direct. He received a call from an Axis Direct executive sometime in February, asking him to sell his Larsen and Toubro (L&T) shares at Rs981. Totally wrong call, leading to huge loss of profit for this investor, as L&T made hit 52-week high at Rs1,387 on 23 April 2014.
Explaining how this happened, the investor told Moneylife, “On 14th February 2014, I received a call from an Axis Direct executive who said, ‘it is a good time to book profits with L&T as there is no positive outlook on the stock and it has max'ed up and the stock cannot go more than the said level and so book profits immediately.’ I sold 120 L&T shares at the price of Rs981. After this point I kept a watch on the stock and I'd have accepted some Rs20 to Rs50 rise/fall in price, I would not have complained. But here the problem is different. The stock kept on rising and its above Rs1,350 which actually converts to a loss of profit of more than Rs44,000.” When he complained, Axis Direct responded by saying, “the stock decision is the sole discretion of the investor!”
The investor said, “Now I am pissed off and have decided to never take the calls from Axis Direct and might abuse them if they come up with advice. Also I believe that this call was made by someone who was low on his monthly targets and I became the victim.”
There are two hard lessons from these examples: 1. Never trust your “banker” to sell you any non-banking product or a third-party product in your interest. 2. Never take buying and selling advice from an employee who has no stake in your profits and losses. Moneylife tells investor not to trade on “hot stock tips” and make investment decision after doing indepth research and analysis. Moneylife Foundation organised free seminar; “Learn to be Safe & Smart with Your Money" on the basics you need to know for your own financial life. Newly launched Moneylife Smart Savers Network provides a complete guide on personal finance.
Investors cannot outsource the job of assessing the risks associated with their investments, selection of right stocks, right time to enter and exit. The Axis Bank bank employee who is pressured to hardsell third party products says, “It is important to restrict banks from selling insurance products (Life & General). Unfortunately the Reserve Bank of India (RBI) has not yet done anything on this issue. These days bank jobs are not to develop one's career as a banker but to become a salesman without paying much attention to the seriousness of banking business.”
In April 2013, Moneylife Foundation sent a memorandum to RBI governor on behalf of more than 21,500 members (at that time) to free the system of mis-selling of financial products by bankers, misusing the savers’ trust.
Moneylife has for long been highlighting the mis-selling of these services with specific examples. This was among the many issues taken up by Moneylife Foundation with RBI deputy governor, Dr KC Chakrabarty, at an Open House meeting in June 2013. In a cover story on such issues, (Read: Banks Vs Depositors ) Moneylife pointed out how selling of insurance, mutual funds and equity advisory services by banks have affected customers, who do not know which regulator will redress their grievance.
RBI ignores complaints about third-party products (some are not even regulated), while Securities and Exchange Board of India (SEBI) and Insurance Regulatory Development Authority (IRDA), both already poor at grievance redress, are even more reluctant to address complaints about mis-selling by banks.
Moneylife has highlighted several stories on mis-selling. A year ago, we wrote about how HSBC Bank promised Suchitra Krishnamoorthi, a well-known singer and actor, extravagant assured return of 24% from mutual funds as well as insurance, but instead continuously churned her portfolio. (Read: HSBC loots Suchitra Krishnamoorthi after big promises of 24% returns). The end result after five years was a direct loss of Rs83 lakh from investment, Rs28 lakh in HSBC commissions to HSBC, Rs18 lakh from decline in value of two insurance policies, Rs4.5 lakh tax paid on redemption of short-term mutual funds (including Rs1.85 lakh penalty to the income-tax department due to non-disclosure of gain by HSBC to the client) and Rs58 lakh interest on home loan earned by the Bank.
On 14 March 2014, the Hongkong & Shanghai Banking Corporation (HSBC) suddenly called actor Suchitra Krishnamoorthi to discuss a settlement to close her long-pending allegation about gross mis-selling that had caused her a loss of over Rs1.85 crore.
(The Real Story of how HSBC Was Made To Pay)
In a similar case, another high net worth individual (HNI) based in London, found out abnormal churning of mutual funds in his portfolio that was managed by HSBC bank. Both are HNIs who were made to sign a power of attorney (POA) in favour of HSBC to handle their investments smartly.
Will RBI intervene in this matter or will it be a silent spectator? Until it does, keep your money in the banks but know that ordinary bankers turn into 'banksters' when they sell you non-banking products like insurance, stocks and mutual funds.
Nowadays, bankers, especially those in private banks have forgotten basic banking and generation of revenues out of banking business, as far as retail savers are concerned. Instead that they have become aggressive salesmen, selling insurance and mutual fund agents selling, often mis-selling these products to their customers or even to non-customers. This is resulting into a total shift of focus from generating revenue from the core banking business to this agency fee income.
FTIL and NHBC are the two key related-parties to which monies have been paid by MCX for the exchange technology solutions and warehousing, respectively, says a report from PwC
Auditing firm PricewaterhouseCoopers (PwC), in a report had said Multi Commodity Exchange of India Ltd (MCX) entered into agreements with related trading parties and paid around Rs709 crore to its erstwhile promoter, Financial Technologies India Ltd ( FTIL) and other group companies without following a proper documentation process.
Following the Rs5,600 crore payment crisis in National Spot Exchange Ltd (NSEL), last December, commodity market regulator Forward Markets Commission had appointed PwC for auditing books of MCX. PwC was asked to examine if NSEL subsidiary Indian Bullion Markets Association (IBMA) and another FTIL subsidiary, National Bulk Handling Corporation (NBHC), traded on MCX.
PwC, in the report, which was released partially by MCX, alleged other inconsistencies and gaps in the way the commodity exchange processed related-party transactions and expressed doubts whether these agreements were conducted on an arm’s length basis.
FTIL, which set up MCX in 2003 but no longer controls the Exchange even while holding a 26% stake, rejected the PwC report. It said it will take legal action against the bourse and PwC for painting a wrong picture in the report.
The PwC report said: “FTIL and NHBC are the two key related-parties to which monies have been paid by MCX for the exchange technology solutions and warehousing, respectively. MCX also entered into related-party transactions with other FT group companies for various ancillary services.”
The PwC audit said that “there are various gaps and inconsistencies noted in the way MCX processed related-party transactions.” The commercial terms and conditions agreed by MCX with related parties were not substantiated by any underlying market benchmarking or competitive bidding process, the report said.
“Additionally, there was limited or no supporting documentation available to evidence the existence, adequacy and robustness of price discovery mechanism which may have been adopted by MCX. Therefore, it is not possible to conclude whether various related party agreements and transactions were indeed conducted on an arm’s-length basis,” the report said.
Officials of FTIL took active part in the affairs of the MCX, including trading, the special audit report has said.
“In various instances, key management personnel of MCX such as ex-CFO, Head-Information Technology, ex-Chief Compliance Officer stated that the decisions were directly taken and instructions received from the ‘Chairman’s office (FTIL)’ or the ‘MD & CEO office’,” said the audit, prepared by PwC.
The audit report, forwarded to stock exchanges by MCX, also found 676 additional entries or individuals who were directly or indirectly related to the MCX or FTIL Group, FTIL key management personnel or their immediate family members by being common directors or shareholders.
In particular, select entities or individuals were allowed to indulge in illegal wash trades, which allows a member to take a position without any intent to execute the transactions.
According to the report, it appears that MCX surveillance activity may not have been commensurate with the steep pace of growth of the exchanges over the year. It also said that there was no formal mechanism to share information on related parties between the membership department and the secretarial department. Therefore, abnormal trades of identified parties were not scrutinised thoroughly, it said.
“This review identified 15,131 instances of trades aggregating to approximately Rs1,856.56 crore where the same party placed buy and sell orders within 60 seconds of each other resulting in no change in the positions. Additionally, in 1565 instances aggregating to approximately Rs1181.72 crore, the buyers and seller were part of the same group of companies who placed orders within five seconds of each other resulting in no change of position within the group,” it said.
The report also mentioned that two members who were debarred by SEBI in July 2006 continued to trade on MCX between September 2006 and December 2011 though the FMC issued a circular mandating that members debarred by other exchanges should not be allowed to trade on commodity exchanges. Name of such member has been removed from the report placed in the public domain but it says that one of these two members was “a member with the highest turnover on MCX in the year 2004.”
The audit agency said that MCX emerged as a significant customer for FTIL by driving about 25% of latter’s revenue. MCX paid approximately Rs649 crore to FTIL on various agreements and transactions. “In spite of this, it does not seem that MCX was able to enjoy adequate bargaining power against FTIL at the time of negotiating the technology support agreements,” the report said adding that contractual terms and conditions forming part of agreements between FTIL and MCX appear to favour the former.
“Under the existing contractual terms and conditions, MCX appears to be contractually bound to FTIL for an unprecedented long tenure ranging between 22 and 50 years with a provision of automatic renewal for up to two similar terms. Further, the termination clause in certain contracts grants termination rights only to FTIL whereas the contracts were silent about MCX’s right of termination,” the report said.
An executive summary of the audit report was sent to the stock exchanges by the MCX. The report was prepared on the orders of commodities market regulator Forward Market Commission. The report is yet to be independently verified by the company.
Jignesh Shah-promoted FTIL is the promoter of MCX and crisis-ridden NSEL.
“At this stage, the company neither agrees nor disagrees with the contents thereof and does not have any opinion on the same and takes no responsibility of the contents or makes no inferences thereon as the same are yet to be independently verified by the company,” MCX said while forwarding the report.
In 1,565 instances aggregating Rs1,182 crore, the buyers and seller were part of the same group of companies who placed orders within five seconds of each other resulting in no change of position within the group.
For FY14, Kotak Mahindra Bank reported higher net profit of Rs1,503 crore on 16% growth in its net interest income
Kotak Mahindra Bank, India’s fourth largest private sector lender, reported a 10% increase in its full year net profit mainly on rise in its net interest income (NII) and total revenues.
For the 12 months to end-March, Kotak Mahindra Bank said its stand alone net profit increased 10% to Rs1,503 crore from Rs1,361 crore, while its total revenues, including interest income, grew 10.47% to Rs10,167 crore from Rs9,203 crore, a year ago period.
During FY14, the private sector lender said, its NII increased 16% to Rs3,720 crore from Rs3,206 crore of FY13. Its net interest margin (NIM) stood at 4.90% from 4.65%, a year ago period.
Kotak Mahindra Bank has made 65% more provisions during FY14 to Rs304.70 crore from Rs184.55 crore a year ago period. As on 31 March 2014, its provision coverage ratio on non-performing assets (NPAs) stood at 55.5%.
As on 31 March 2014, total advances of Kotak Mahindra Bank increased 9% to Rs53,028 crore compared with Rs48,469 crore, a year ago period. Its total deposits, during the year, increased 16% to Rs59,072 crore and saving account deposits grew 39% to Rs10,087 crore compared with same period a year ago, while its current and saving accounts (CASA) stood at Rs18,828 crore from Rs14,918 crore.
Kotak Mahindra Bank's capital adequacy ratio (CAR) stood at 18.83%, gross non performing assets ratio (GNPAs) stood at 1.98% (Rs1,059.44 crore). Its net non-performing assets stood at 1.08% (Rs573.56) as on 31st March 2014.
For the quarter to end-March, the lender said its stand alone net profit fell 6.66% to Rs407.18 crore from Rs436.21 crore, while its total revenues, including interest income, declined marginally (0.75%) to Rs2,552.96 crore from Rs2,572.23 crore, same period last year.
As on 31 March 2014, the Kotak Mahindra Bank's total number of branches and ATM network stood at 605 and 1,103 respectively.
Kotak Mahindra Bank declared a dividend of Re0.80 per share.
Kotak Mahindra Bank shares closed Wednesday marginally down at Rs803.20 on the BSE, while the 30-share Sensex ended the day flat at 22,417.
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