Companies & Sectors
HDFC Bank pitches toxic product to NRIs

HDFC Bank is targeting non-resident Indians (NRIs) with a fixed income product, exposing them to foreign currency fluctuations. If a customer loses money, he has to be blamed, of course, for falling for this hard-sell from his 'trusted' banker

Rupeemax is a product that HDFC Bank is targeting at non-resident Indians (NRIs) with the tagline “Earn better returns on your NRE Deposits: 12%.” A breathless email message, seeking appointments with well-heeled NRIs, draws attention “to a very interesting opportunity in the NR FD space.” The marketing pitch says: NRE FDs have earned 8.75% compounding quarterly over a 5-year period giving a tax free, repatriable interest of 10.83% over that period. For that same period, HDFC Banks claims, “we can enhance the rate from 8.75% to 9.5%, which with the compounding effect can deliver an annual yield of 11.9% to12.10% as against 10.83%.” The ‘key concern’ is a 5-year lock-in to maturity. The official goes on: “I believe this is an excellent opportunity and is short lived as this enhanced yield is a function of cross currency movements, which currently are in favor.!!!!!!!!!!!!! Also the interest rates are expected to head downwards in the near future wherein this makes a lot of sense.”

Dr KC Chakrabarty, deputy governor RBI, tells customers to be wary of higher returns offered by banks. The global consultant who received this was certainly sceptical and checked with a fund manager who, in turn, sent it to Moneylife with this comment: “Is this real or is HDFC Bank pulling a 3-card trick?” A simple reading of the email suggests it is pitching a fixed deposit with a 5-year lock-in. We asked the Bank if the email was genuine.

A response from HDFC Bank’s NRI team underscores the dangerous toxicity of the product. It says the product is built on the fact that RBI guidelines allow NRIs to “hedge their FCNR and NRE deposits.” It assumes that “NRIs are normally sophisticated investors with knowledge of cross currency risk. They compare the interest rates offered on FCNR and NRE deposits and other similar investments available across different geographies. Depending on the interest rates available on these deposits and forward premia prevailing at the time, NRIs tend to invest in FCNR deposits and sell foreign currency in the forward leg (with the maturity proceeds) thereby earning a better rate than on NRE deposit. Conversely, NRIs may tend to invest in NRE deposits and buy foreign currency in the forward leg (using the maturity proceeds) thereby earning a better rate than on FCNR deposit. These are, of course, permissible transactions in accordance with the above quoted provisions of law.”

Really? Most of our NRI friends and relatives, even in the finance industry don’t have a fraction of the base sophistication that HDFC Bank is assuming. Worse, it is pitched at people whose money is safely in tax-free NRE fixed deposits. HDFC Bank goes on to explain that “the rate of 12% quoted in the mail was indeed the maximum rate that a client could have earned by investing in this product yesterday. This yield was available by booking a 5-year Japanese Yen FCNR deposit and selling the Yen maturity proceeds in the forward leg. The risk factors and other aspects that need to be known by clients are shown in the emailer.” Is the vague line about the yield being a “function of cross currency movements” which are “currently in our favour” an indicator of product risk? In fact, the only risk flagged by the email is the 5-year lock-in, which skilfully suggests that the higher return is the reward for locking in his money for five years. There is no indication that a 12% return is not guaranteed. If a customer loses money, he has to be blamed, of course, for falling for this hard-sell from his trusted banker. Will RBI put in place any mechanism to check such blatant mis-selling of even fixed-income products? Globally, regulators are moving away from the principle of caveat emptor, which had left savers to the mercy of snake-oil salesmen in bankers’ garb. When will RBI start thinking along these lines and put in place a mechanism to report such products?
 

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COMMENTS

Anil

3 years ago

Hello, sorry but I haven't quite understood the risk in this product from the article above. I was pitched this product a few months back and didn't have the time to invest in it but am interested in investing now (hence reading this article) and don't see the risk beyond the long tenor. Isn't the rate fixed? The only "catch" is that I will perhaps not know the fixed rate until the actual time that I invest in it (since markets fluctuate all the time). I can always take the decision at that time to invest or not to invest, and once I do, the return is locked. So, what's the hidden risk please?

REPLY

Saroj

In Reply to Anil 2 years ago

Risks
1. Ambiguity on Taxation
2. Long Tenure coupled with Liquidity issues

Fixed and Higher yield in comparison to the plain NRE Deposit is the flagship benefit of this product.


Every investment option has some or the other advantage over the other options and in the same way dis-advantages too. It is up-to the investor's requirements and situations.

reach me at [email protected]

Gupta

In Reply to Anil 3 years ago

You are right Anil. It is a fixed rate, but you will know it at the time you actually put in the money and you then have the option of backing out if you don't like the prevailing rates at that point. The only risk is liquidity cost - you can withdraw prematurely if you wish, but the bank will have to unwind the forward swap they booked initially and neither you nor the bank can project what that cost will be because it is subject to market movements. Hence, this product should be invested in only if you are sure you won't need the money before maturity.
By the way, I doubt the product is still available as most banks shut this down after RBI withdrew the cheap USD/INR swaps it was offering till Nov 30 @ 3.5%. So you would be lucky if some bank is still offering this to invest now. FCNR rates have also gone down for the same reason since Dec, so you might be better off going for a vanilla NRE deposit if you are looking to invest in INR and not USD.

Anil

In Reply to Gupta 3 years ago

Thanks a lot Gupta!

Gupta

3 years ago

Really sad that someone like Sucheta Dalal writes such articles. Have been tracking you in TOI since the Harshad Mehta scam and always held you in high regard because of your work in exposing the scam. Would expect much better quality and right information, rather than eye catchy "toxic" headlines to gain subscribers. Nothing wrong in trying to gain more subscribers as you run a commercial business, but that can be done with the right approach. May be this article could have spent time educating investors about the real risks in the product, rather than focusing energy on abusing the bank. People would really thank you and buy more of your magazines.

REPLY

Sucheta Dalal

In Reply to Gupta 3 years ago

The biggest piece of rubbish is the high esteem about exposing the Harshad mehta scam. I am sure people like you would have been cursing me for your losses in 1992, unless you were in school then and had not started investing.
People like you thought that the market was as safe then. And the ready-forwards and informal ready forwards that EVERY SINGLE BANK WAS INDULGING IN WAS FINE AND DANDY. If you were a citibanker or from standard chartered bank those days or even can bank or andhra bank, you would have been cursing me just as you are today. So dont spout this rubbing about respect or pretend there is a difference.

Gupta

In Reply to Sucheta Dalal 3 years ago

Do we need to be so opinionated that even a compliment is seen with suspicion! Yes, the world is full of motivated people and I know you are after them. I appreciate that. It is a different matter whether you want to believe that or not. I neither lost money in 1992, nor was I a citibanker, or scb banker or andhra or canara banker. I was a school going kid then with high levels of interest in finance. I possibly still have cut outs of some of your articles in TOI written in those times if I dig them out.
I guess you don't need opinions here on this site, just more people who spill venom in every word they utter. So I'll try not to spoil the party by posting more comments here!

Gupta

3 years ago

Really sad that someone like Sucheta Dalal writes such articles. Have been tracking you in TOI since the Harshad Mehta scam and always held you in high regard because of your work in exposing the scam. Would expect much better quality and right information, rather than eye catchy "toxic" headlines to gain subscribers. Nothing wrong in trying to gain more subscribers as you run a commercial business, but that can be done with the right approach. May be this article could have spent time educating investors about the real risks in the product, rather than focusing energy on abusing the bank. People would really thank you and buy more of your magazines.

Gupta

3 years ago

Magazines like yours are equally to blame for the financial crisis like the banks. Do you have any knowledge that a forward contract as a product means "guaranteed return". This is indeed a guaranteed return product any many sensible investors invested in it. The RBI got $32 Billion through this product to build its forex reserves (11% of RBI's total forex reserves including gold value). So KC Chakravarty is a happy man, don't worry about him. Clearly, this product is not meant for blue collar workers, but nothing wrong in selling it to other investors who understand the 2 key risks - 1) lock in for 5 years (you can still exit before 5 yrs, but at a big cost). 2) taxability of half of the 12% is not clear, but assuming that is taxable, it is not a bad deal. So please gets some financial intelligence before writing such sensational articles. People who lost the opportunity to invest after reading your article would curse your magazine.

REPLY

Sucheta Dalal

In Reply to Gupta 3 years ago

You wake up to a june 2013 article and start posting nasty motivated messages. We would like to know what is your interest.
let me tell you, a much "SAFER" ready-forward pitched to unsuspecting investors of NSEL has left THEM cursing not US. And those investors want us to fight their battle after the war is over and losses largely irrecoverable.
But when the going was good, I am sure people like you would have cursed us similarly for making people LOSE a GREAT opportunity to make money.

I think you should keep your financial intelligence yourself -- moneylife is for ordinary savers, not financial experts. A product meant for people with expert knowledge JUST cannot be pitched to others without explaining the nature and extent of risks. Several people who were pitched the product, including doctors and IT experts told us exactly how it was pitched to them. So please dont give me your great financial knowledge without understanding the point of the article

Gupta

In Reply to Sucheta Dalal 3 years ago

Waking up now because google search brought me here while I was searching for something else. As I said in my post, this product is not for everyone. So I agree with you that it cannot be pitched to everyone and that is wrong. Unfortunately, your article doesn't focus on that, but rather paints the product black by questioning the terms of the product. That does no one any service because the cure for this problem is not to ban the product. The product is ok and is indeed "guaranteed". And my interest is just to balance these opinions by giving a different perspective.
Mis-selling is a different issue altogether and that can be true even with a basic diversified mutual fund or insurance product. I have seen a housewife sitting on the next counter in a HDFC branch being sold a equity linked insurance plan as a guaranteed return product (and the "advisor" lost his pants when I intervened to question him). My wife has been (mis)sold another very simple MF product by an ICICI employee. Problem is not the product (whether MF, FD, insurance, or any other product). Problem is the selling practices and motivations of those selling, which is purely targets and commission. SEBI made a small move to shift the industry to advisory fee from commissions, but is still castigated (by the sellers). Unfortunately, they can't succeed alone till the entire industry with all regulators adopts similar regulations (and people in India learn to pay for this kind of service).
I also agree with your view point on investor attitude like in the NSEL case. Unfortunately, that is how investors behave (just like their reactions to Indian cricket team winning or losing). But NSEL falling off the cliff is more because of the weak regulatory environment it operates in and the quality of management. I don't think it is fair to paint everyone with the same brush. The return being offered in the HDFC case is because of market opportunity and change in RBI regulations, not leveraging the money for high risk investment. Surely, we can be a little more objective in these comparisons. I hope you will agree with that.

NIAZ BIN YUSUF

3 years ago

The article picks on standard bank disclaimers in a desultory manner. However, there is absolutely no mention / analysis of the risks involved. Completely blank on the toxicity of the product.

Gaurav

3 years ago

I am not part of HDFC Bank Bashing forum here, we have had kept our investments with them since long time.
And we are relatively happy,

Also to let you know we did invest in the product and we have relative degree of comfort as Bank has given us in writing the exact maturity amount.

Abhijit Gosavi

3 years ago

Thank you for this article!!!

Rohan Monteiro

3 years ago

As an NRI, ive just been called by HDFC asking me to participate in this...the lock in period had now been reduced to 3 years and the cust-rep is guaranteeing that forex changes will not impact the value of the guaranteed 11.83% return (he says currency fluctuations wont impact anything because it is a futures contract)---can someone advice me on this?

[email protected]

REPLY

Arun Mehta

In Reply to Rohan Monteiro 3 years ago

Yet another act of "bait" and switch to lure NRI's.

Priya

3 years ago

Good work, thanks for exposing HDFC bank's product

Arun Mehta

3 years ago

There should be special audit of all "Mis-Selling" activities of HDFC Bank and the report made Public.

DB DESAI

3 years ago

This is a story about complex product offered for so called sophisticated investors but it is the same with the other products for indian resident retail customers of this bank and other banks. The Banks should immediately be banned from selling anything else than their banking products. Nobody should worry about rural penetration, insurance penetration, equity culture and financial inclusion etc. All these things are the avenues for such misselling practices. There should not be anything promoted at the cost of the ethics, genuine dealings with public money. Whatever progress in whichever area is to be made, it should be and must be with these principles and not at the cost of these principles.

Suiketu Shah

3 years ago

Superb article with an excellent headline

Hemlata Mohan

3 years ago

Surely is this a bank having Mr Deepak Parekh on board?
Or, are we missing something that is not clearly understood by us?

REPLY

Gupta

In Reply to Hemlata Mohan 3 years ago

Yes, you are misunderstanding.. because the author of the article doesn't understand the product. So he is "mis-writing", the bank is not "mis-selling" !!!

Dayananda Kamath k

3 years ago

this is fit case for rbi to look into. foreign exchange regulation act(FERA) to foreign exchange management act(fema) leads to foreign exchange mismanagement. that is the reason indian rupee is getting weak.

Ramesh Iyer

3 years ago

Seems the only reason HDFC Bank manages to get away with such blatant banking rules violations is because of its clout and perhaps blessings of certain politicians, a la certain Vijay Mallya. It is notorious for charging customers innovatively, mostly for services which other private Banks (and PSU Banks) offer free of cost.

REPLY

Gupta

In Reply to Ramesh Iyer 3 years ago

you have a choice to switch to another bank, isn't it! Why abuse the bank, they are free to charge what they like as much as we are free to switch to other banks!!

I'm a HDFC customer for >17 years and I find them the best.

Consumer confidence level rises in May: BluFin

BluFin's Consumer Confidence Index (CCI) rose to 41.4 points in May, an increase of 3.4 points since the beginning of the year, due to improved spending behaviour coupled with easing inflation

Indian consumers' confidence level rose in the month of May on the back of to improved spending behaviour coupled with easing inflation, a study by financial services provider BluFin revealed.

 

BluFin's Consumer Confidence Index (CCI) rose to 41.4 points in May, an increase of 3.4 points since the beginning of the year.

 

The index is a key ‘aggregate’ indicator that assesses the pulse of urban Indian consumers with regard to the economy, spending behaviour and employment. The index reflects pessimism at below 50 score and optimism above that.

 

The two key components of the CCI indicated improvement in the consumer sentiment.

 

A sub index, which rates inflation sentiment, rose from 23.9 points in January to 26.8 points in May, while the spending sentiment improved from 28.3 points to 30.5 points in the same period.

 

However, pessimistic views on employment continue to be a small drag on the consumer confidence index. The employment sentiment declined to 50.2 points in May from 51.4 points at the beginning of the year.

 

Nonetheless, the score itself is encouraging as it is above the benchmark level of 50.

 

Another sub-index, which measures future expectations, was at 40 points, indicating consumers were still pessimistic about the economy's prospects. However, consumers were more comfortable about their present situation with a score of 46.

 

In terms of region, consumer confidence in North India registered a rise of about two points to 39 points in May, after a steady decline since January 2013.

 

“North Indian consumers, who have been the most sensitive to economic vagaries in the recent past, have been showing increased propensity to spend. This makes the North India numbers a lead indicator of an impending turnaround in overall consumer sentiment in India,” BluFin CEO Rashid Bilimoria said.

 

“A key driver for this improvement is declining pessimism about inflation among consumers leading to a rising expectation of a rate cut,” he added.

 

The survey has shown consumers in the eastern region of India to be the most pessimistic while those in the southern states to be the most optimistic, with cities such as Bangalore generally scoring above the benchmark level of 50.

 

The index is based on nation-wide monthly surveys of 4,000 respondents across 18 cities conducted by custom market research company TNS.

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The NSA black hole: Five basic things we still don’t know about the Agency’s snooping

The recent leaks have shed light on one of the darkest corners of the U.S. government -- but when it comes to mass surveillance practices, clarity remains elusive

Last week saw revelations that the FBI and the National Security Agency have been collecting Americans’ phone records en masse and that the agencies have access to data from nine tech companies.
 

But secrecy around the programs has meant even basic questions are still unanswered. Here’s what we still don’t know:
 

Has the NSA been collecting all Americans’ phone records, and for how long?
 

It’s not entirely clear.
 

The Guardian published a court order that directed a Verizon subsidiary to turn over phone metadata -- the time and duration of calls, as well as phone numbers and location data -- to the NSA “on an ongoing daily basis” for a three-month period. Citing unnamed sources, the Wall Street Journal reported the program also covers AT&T and Sprint and that it covers the majority of Americans. And Director of National Intelligence James Clapper himself acknowledged that the “collection” is “broad in scope.”
 

How long has the dragnet has existed? At least seven years, and maybe going back to 2001.
 

Senate Intelligence Committee chair Dianne Feinstein, D-Calif., and vice chair Saxby Chambliss, R-Ga., said last week that the NSA has been collecting the records going back to 2006. That’s the same year that USA Today revealed a similar-sounding mass collection of metadata, which the paper said had been taking place since 2001. The relationship between the program we got a glimpse of in the Verizon order and the one revealed by USA Today in 2006 is still not clear: USA Today described a program not authorized by warrants. The program detailed last week does have court approval.
 

What surveillance powers does the government believe it has under the Patriot Act?
 

That’s classified.
 

The Verizon court order relies on Section 215 of the Patriot Act. That provision allows the FBI to ask the Foreign Intelligence Surveillance Court for a secret order requiring companies, like Verizon, to produce records – “any tangible things” – as part of a “foreign intelligence” or terrorism investigation. As with any law, exactly what the wording means is a matter for courts to decide. But the Foreign Intelligence Surveillance Court’s interpretation of Section 215 is secret.
 

As Harvard Law Professor Noah Feldman recently wrote, the details of that interpretation matter a lot: “Read narrowly, this language might require that information requested be shown to be important or necessary to the investigation. Read widely, it would include essentially anything even slightly relevant — which is to say, everything.”
 

In the case of the Verizon order -- signed by a judge who sits on the secret court and requiring the company to hand over “all call detail records" -- it appears that the court is allowing a broad interpretation of the Patriot Act. But we still don’t know the specifics.
 

Has the NSA’s massive collection of metadata thwarted any terrorist attacks?
 

It depends which senator you ask. And evidence that would help settle the matter is, yes, classified.
 

Sen. Mark Udall, D-Colo., told CNN on Sunday, “It's unclear to me that we've developed any intelligence through the metadata program that's led to the disruption of plots that we could [not] have developed through other data and other intelligence.”
 

He said he could not elaborate on his case “without further declassification.”
 

Sen. Feinstein told ABC that the collection of phone records described in the Verizon order had been “used” in the case of would-be New York subway bomber Najibullah Zazi. Later in the interview, Feinstein said she couldn’t disclose more because the information is classified. (It’s worth noting that there’s also evidence that old-fashioned police work helped solve the Zazi case — and that other reports suggest the Prism program, not the phone records, helped solve the case.)
 

How much information, and from whom, is the government sweeping up through Prism?
 

It’s not clear.
 

Intelligence director Clapper said in his declassified description that the government can’t get information using Prism unless there is an “appropriate, and documented, foreign intelligence purpose for the acquisition (such as for the prevention of terrorism, hostile cyber activities, or nuclear proliferation) and the foreign target is reasonably believed to be outside the United States.”
 

One thing we don’t know is how the government determines who is a “foreign target.” The Washington Post reported that NSA analysts use “search terms” to try to achieve “51 percent confidence” in a target’s “foreignness.” How do they do that? Unclear.
 

We’ve also never seen a court order related to Prism -- they are secret -- so we don’t know how broad they are. The Post reported that the court orders can be sweeping, and apply for up to a year. Though Google has maintained it has not "received blanket orders of the kind being discussed in the media."
 

So, how does Prism work?
 

In his statement Saturday, Clapper described Prism as a computer system that allows the government to collect “foreign intelligence information from electronic communication service providers under court supervision.”
 

That much seems clear. But the exact role of the tech companies is still murky.
 

Relying on a leaked PowerPoint presentation, the Washington Post originally described Prism as an FBI and NSA program to tap “directly into the central servers” of nine tech companies including Google and Facebook. Some of the companies denied giving the government “direct access” to their servers. In a later story, published Saturday, the newspaper cited unnamed intelligence sources saying that the description from the PowerPoint was technically inaccurate.
 

The Post quotes a classified NSA report saying that Prism allows “collection managers [to send] content tasking instructions directly to equipment installed at company-controlled locations,” not the company servers themselves. So what does any of that mean? We don't know.
 

For more on mass surveillance in America, read our timeline of loosening laws and practices.
 

Courtesy: http://www.propublica.org/

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