Companies & Sectors
Corporates should not be allowed into banking space: Stiglitz

According to Nobel laureate Joseph Stiglitz the real problem in the financial sector are issues of conflict of interests and when you have corporates opening their own banks, you are opening a venue for conflict of interests

Mumbai: Nobel laureate Joseph Stiglitz has said corporates should not be allowed to enter banking space as it has the potential to create conflict of interests, reports PTI.

 

"I think, the real problem in the financial sector are issues of conflict of interests. And when you have corporates opening their own banks, you are opening a venue for conflict of interests," Stiglitz said replying to a question on new banking licences expected to be issued by the Reserve Bank of India (RBI) and interest shown by the corporates for the same.

 

Stiglitz drew parallels with the US scenario, specifically to the one concerning rating agencies to highlight the possibility of conflict of interest.

 

"You can only hope that you can monitor them and we hope that credit rating agencies do their jobs too," he said.

 

Stiglitz was in the city for delivering the CD Deshmukh Memorial Lecture organised by the Reserve Bank of India.

 

The Parliament has recently passed amendments to banking laws, which pave the way for the entry of new players into the arena.

 

A slew of corporates have evinced interest in entering the fray and ball is in the court of RBI, which is yet to come up with final guidelines regarding the eligibility criteria.

 

He also said the argument of bringing 'economies of scale' by giving licences to corporates did not hold water.

 

"The dangers of conflict of interest outweigh any economies of scale that I can bring up," Stiglitz said.

 

Drawing parallel between the debate in the western world regarding the conflict of interest with respect to separation of investment banking and pure banking operations, the world renowned economist also said that a Chinese wall cannot be created between the two.

 

Referring to management of banking regulations, he said the RBI has done a commendable job both in avoiding the crisis as well as during the last four years since the crisis set in.

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COMMENTS

R Balakrishnan

4 years ago

As it is, we are overbanked. The problem is not of more banks, but banks with more capital/assets. That way, the Fin Min plan to consolidate by grouping/merging three bank clusters is good. Only thing to be done is to privatise them, so that the management can be independent of north block. RBI also does not want business houses to get banks, but wonder what the Fin Min wants.

Are you trapped in toxic ULIPs? Blame IRDA - I

Insurance policyholders entrapped in toxic Unit-linked Insurance Plans like that of Century Plus of Bajaj Allianz are still paying the price for products approved by IRDA and then banned in September 2010. Insurers openly dare the insured to go to the ombudsman, as they are emboldened by customer signatures on the dotted line

Suresh Nayak (name changed) is an ex-serviceman who served in 1971 Indo-Pak war. Even though he was victorious on the battleground over 40 years ago, he is today fighting a losing battle with Bajaj Allianz Life Insurance. His investment of Rs1 lakh in January 2008 has been reduced to Rs20,586 thanks to the toxic policy administration charge (PAC) of 1.75% of sum assured (SA) in Century Plus ULIP; the SA being Rs5 lakh in this case. How can the PAC be linked to the insurance cover taken, when it should only affect the mortality charges calculation? Why did IRDA (Insurance Regulatory and Development Authority) approve such toxic fine print?

 

While the fine print of charges may seem innocuous, it has eaten up 44% of his investment over five years. Even if the investment was put in debt funds instead of equities, any increase in NAV would have been negated by the heavy deduction of units under the garb of PAC. The investment is a guaranteed loss-making proposition even on a long-term basis. If the customer remains invested in the policy, the fund value may possibly go down to zero in a couple of years.

 

What service has Bajaj Allianz really given to deserve getting 44% of the investment over five years to administer the policy? After all, the fund administration charge is separately levied to manage the fund. The risk is taken by the customer in ULIP. If equities perform badly, the fund value goes down. The insurer still gobbles a hefty PAC of 9% p.a. Not to mention about premium allocation charge of 2% for first two years. The insurer wins by taking the policyholders to the cleaners.

 

Even though IRDA has banned old ULIPs since September 2010, what is the recourse for the policyholders who have been already trapped? It is time IRDA takes stock of the situation and offer relief to policyholders who are trapped in products it approved only to be banned later. It is especially true for old ULIPs which continue with atrocious charges even after completion of three policy years.

 

Bajaj Allianz has openly dared Mr Nayak to go to the insurance ombudsman by giving all the contact details in the email. He claims that company’s grievance department personnel told him over the phone that it can consider paying Rs65,542, but later backed out from the offer by giving email response detailing all the charges that reduced the investment to a paltry sum of Rs20,586. Bajaj Allianz denies the allegations made by the customer about being offered Rs65,542.

 

The insurance company knows that the ombudsman’s hands are tied as the customer has already signed on the dotted line irrespective of whether he understood the fine print of charges. In many cases, the agony of the policyholder does not end here. Many old ULIPs have horrendous surrender charges. It means the customer is trapped between the PAC and surrender charges. The customer cannot come out of it alive!

 

Here is how Bajaj Allianz Century Plus ULIP’s surrender charge formula can deter the policyholder from exiting the policy. The surrender charge formula is [1 - (1/1.10)^N ] * first years’ annualised premium (where N is 5 years, less the elapsed policy duration in years and a fraction thereof). In the case of Mr Nayak, the surrender charge will be Rs9,090 in case he surrenders before completion of five years. It means if Mr Nayak wants to surrender today, he will get only Rs11,496. There is no surrender charge after completing five years. 

 

IRDA needs to wake up to the reality of what policyholders have got into with the creative products designed by insurance companies to make them rich at the cost of common man. The products have been wealth destroyers for hard working people lured into the tax savings trap. An insurance company will design innovative products to fulfil its bottom line and agents will sell to get their commission, but IRDA approved the products. Banning it in September 2010 did not solve the problems faced by existing policyholders.

 

The issue is not just about Bajaj Allianz ULIP. It is the same with many other toxic ULIPs from other insurance companies too. In the second part of the article we will talk about other such examples and cases where surrender of old ULIPs may not make sense, especially if the charges have been substantially reduced after three policy years.

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COMMENTS

madhur murarka

4 years ago

Do distributors have no responsibility to vet products they sell? Any responsible nation would first crucify the guy who sells toxic products.

REPLY

raj

In Reply to madhur murarka 4 years ago

Agreed, but responsibility is also with IRDA and Insurance company If a toxic product is not there in the market, agent cannot sell it.

Rajiv Jhaveri

4 years ago

Debate & Comments should be targeted to right direction. If Insurers charge upto 100% in Traditional plans & upto 20% in ULIPs, we all should demand reduction of charges in both plans. Why should we discuss only about charges of ULIPs, if other plans charge 3 or 4 times higher than ULIPs. If IRDA will make it mandatory to provide illustrations (with disclosure of all charges) in all plans including traditional ones, we will come to know how much we are charged. Hidden policy spoils the goodwill of the Industry.

REPLY

raj

In Reply to Rajiv Jhaveri 4 years ago

You are right about traditional plans and Moneylife has also written extensively about the product flaws.

Moving from new ULIPs (post Sep 2010) to traditional plans is like jumping from frying pan into fire. Traditional plans are selling today only because of commission.

Hope IRDA addresses these issues in the draft regulation on traditional products which is expected too.

This Moneylife article was focused on old ULIP issues.

siddharth biswal

4 years ago

these toxic products don't have any easy exit method.Its apparent that hefty amounts had been paid for approval to IRDA authorities.Luckily Mr Harinarayan put a stop to that.But why is he silent on old issues-old policies continue charging higher PAC even though performance has deteriorated.Why there is not a performance linked Fund mgmt charge?What Bajaj has done to charge exorbitant PAC.By any reason it is stealing.Why is IRDA silent?Does IRDA responsibility limited to new policies only?IRDA silence shows that it is shy of taking insurance co head on.Can Mr Harinarayan give troubled policyholders a nice parting gift before he goes?Time will tell.

raj

4 years ago

I agree with all the comments. IRDA needs to give relief to existing policyholders of old ULIPs, especially if the charges are still high after three years.

DB DESAI

4 years ago

The charges on all types of insurance policies should be immediately brought down to 2% only without any gimmicks. There is no need to do any research, regulation, awareness etc. Just reduce the commission and see the difference. Dont worry about insurance business. Just make it like mutual funds. All problems will vanish in a fraction of second. Dont care about the industry, care about the investors, people. But like in cigarettle, alcohol business it seems that India is more worried about industry, few workers, tax income than the general public. Great.

Rajiv Jhaveri

4 years ago

Why IRDA allows such heavy charges? Not only ULIPs but also Traditional Plans, tell same story. Traditional Plans are sold till today without disclosure of charges. Benefit illustration with disclosure of all the charges, should be made compulsory in traditional plans also. Why IRDA is silent?

DEEPAK KHEMANI

4 years ago

The Market is full of cases like these with "investors" having no recourse,I personally have met a number of people who have been cheated of their hard earned money by Bank managers, Relationship managers, and Insurance agents who have not informed their clients of the hidden charges these plans have, another innovative way to make money was to have reduced the premium(Sum Assured) to 10% of original after a few years, so initially one paid a large amount(The first year commission was very high)and then paid a smaller amount to keep the policy active. Most of these polices values are down 50-80% of their original investments!

Italian Marines return to Kochi for facing trial

Two Italian marines were arrested on 19th February last year for shooting to death two Indian fishermen from onboard merchant vessel 'Enrica Lexie'


Kochi: After celebrating Christmas with their families, the two Italian Marines, facing murder charges in the Indian state of Kerala, arrived by special charter plane this morning, reportrs PTI quotint officials.

 

Massimiliano Latorre and Salvatore Girone, who were allowed to go home for two weeks by the Kerala High Court, came by a special flight for Kochi at 7.50am, airport sources said.

 

They will soon leave for the Kollam court in Kerala to surrender their passports.

 

The marines were arrested on 19th February last year for shooting to death two Indian fishermen -- Ajesh Binki (25) and Jelestine (45) from onboard merchant vessel 'Enrica Lexie' off Alapuzha coast, 'mistaking' them for Somali pirates.

 

Stringent conditions had been laid down by the court, which had asked them to return by 10th January. The Kollam sessions court had asked them to be present for the trial on 15th January.

 

The Italians had also executed Rs6 crore (about $1.1 million) as bank guarantee as directed by the Kerala High Court for allowing them to leave for two weeks.

 

Kerala Government had opposed the marines plea in the High Court by saying it was a ruse to "smuggle them out" and would "torpedo" the ongoing trial.

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