“Banks should not be selling third-party products,” RBI deputy governor
Moneylife Digital Team 06 June 2013

In an Open House session in Mumbai, RBI’s Deputy Governor openly agreed with Moneylife Foundation’s stance that banks should not sell non-banking products like wealth management services, insurance and gold
 

At a Moneylife Foundation’s open house attended by a packed audience in Mumbai, deputy governor of Reserve Bank of India (RBI) Dr KC Chakrabarty said, "My view is that banks should not be selling third party products. In fact, life insurance has been in India since independence, but till 1994-95 there were no banks selling insurance or mutual fund products. I fully support that the regulator must decide what is mis-selling. It must decide that if the bank is selling insurance products, what should be the conditions required to be fulfilled.”
 

Dr Chakrabarty was responding to Moneylife Foundation’s appeal that banks should not be allowed to sell third-party or non-banking products like is insurance, gold and mutual funds because they are untrained to so do and do not take responsibility of the outcome in any manner.
 

In the foreword to the Annual Report on the Banking Ombudsman Scheme 2011-12, Dr K C Chakrabarty writes, “The incentive structures governing sale of different financial products and services tend to result in mis-selling. It is frightening to imagine a situation where the front line staff at banks may be more interested in pushing insurance and para-banking products instead of promoting core banking products.”
 

Dr Chakrabarty further says, “The role of the top management of banks becomes very crucial in formulating product and service delivery and pricing strategies with a clear focus on fair treatment of customers, appropriate disclosure of product features and risks and suitability of ‘sell’ for different segments of customers.”

 

On 18 April 2013 Moneylife Foundation had presented a memorandum to RBI Governor (http://foundation.moneylife.in/?page_id=2000) on unchecked mis-selling by bank relationship managers. It says, “Banks’ relationship managers have been particularly brazen in recommending financial products to their customers while completely disregarding their financial situation. It is commonplace to hear of a senior citizen being conned into investing in a mutual fund, unit-linked insurance plan or a hybrid-derivative product on the promise of higher returns. In many cases, private bank executives go over to their homes and persuade them to break secure fixed deposits and invest the money in Unit Linked Insurance Products (ULIPs) with the false assurance that these are as safe as fixed deposits and offer a higher return and security.”

 

Moneylife had highlighted the case of Ms Suchitra Krishnamoorthi, a well-known singer and actor, who was taken for a ride by HSBC Bank for over five years. The modus operandi for HSBC in this case has been a combination of toxic churning of the portfolio management system (2% entry load on every purchase made by it on behalf of client), insurance products promising 24% returns, insisting her on taking a loan instead of withdrawing funds without even disclosing that the client was entitled for a smart loan.
 

Read - HSBC loots Suchitra Krishnamoorthi after big promises of 24% returns
 

A strong campaign by Moneylife through its website and its social media properties got quick justice for a 79-year old man with an ailing wife. IndusInd Bank officials had deceitfully persuaded him break his fixed deposit with the bank and invest in a wrong product. The bankers came—at 11.30 in the night—bearing a demand draft of Rs7 lakh covering the amount he was persuaded to withdraw from his fixed deposit and invest in DWS’s mutual fund scheme with a five-year lock in period.
 

Read -Mangelal Sharma gets his Rs7 lakh back—another Moneylife victory
 

RBI’s new guidelines to regulate banks’ wealth management operations and third party product distribution would be released by the end of June. It also aims to strengthen the know your customer (KYC) norms, anti-money laundering (AML) standards and rules to combat financing of terrorism.
 

RBI said that banks offering wealth management services were exposed to reputational risks on account of mis-selling of products, conflict of interest, lack of knowledge and clarity on products and frauds. Bank employees were receiving incentives from third parties for selling their products. Such practices may lead to mis-selling and distortion of the staff incentive structure.

 

Comments
COL H S SAWHNEY
8 years ago
Sucheta Pl help I have also been cheated TWICE by AXIS Bank by persuading me top invest in DWS Mutual FUND with Lock in period with poor pathetic meagre returns Pl call me 09850068030 urgent
COL H S SAWHNEY
G N GHOSH
1 decade ago
IT IS A VERY WELCOME DECISION BY THE DY GOV OF RBI. PRESENTLY BANK IS DRIVEN THE SALE OF THIRD PARTY PRODUCTS LIKE MF, LIFE INSURANCE,GOLD, PORTFOLIO MANAGEMENT SERVICE WITH REVENUE TARGET.THE TARGET IS GIVEN BY THE HEAD OFFICE TO EVERY BRANCH TO MEET THE BROKERAGE COLLECTION & OFFER HEAVY INCENTIVES TO BRANCH MANAGER AND OTHER SALES EXECUTIVES.SO THESE PEOPLE MAKE BANK CUSTOMERS A SOFT TARGET CLIENT TO SALE LIFE INSURANCE AND HIGH BROKERAGE EARNING MUTUAL FUND PRODUCTS. THEY HAVE EASY ACCESS TO THE CUSTOMERS SAVING AND CURRENT AC BALANCES & MOTIVATE THEM TO PUT MONEY IN SCHEMES NOT CONSIDERING THE CUSTOMERS FINANCIAL POSITION AND REQUIREMENTS.EVEN SOME TIME BRANCH MANAGERS BLACK MAIL THE CUSTOMERS COMING FOR LOAN TO PURCHASE LIFE INSURANCE OTHERWISE LOAN WILL NOT BE SANCTIONED. THEY USE OTHER STAFFS IN THE BANK LIKE CUSTOMER SERVICE EXECUTIVES, OPERATION MANAGERS, CASH COUNTER STAFFS TO CATCH AND PRESSURIZE THE CUSTOMERS TO INVEST MONEY IN HIGH BROKERAGE EARNING SCHEMES. THESE SALESMAN OF THE BANKS HARDLY REMAINS FOR 1 - 2 YEARS IN THE BANK ,THEN THEY EITHER TRANSFERRED OR LEAVES THE JOB, IN THIS SITUATION IF A CLIENT SUFFERING FROM MISSSALE BY BANK STAFF THE BRANCH PEOPLE WILL KICK HIM OUT BY SAYING THAT EARLIER STAFF WAS DONE WRONG AND NOW WE ARE NOT RESPONSIBLE FOR THAT. SO BANKS SHOULD BAR TO SALE ANY TYPE OF THIRD PARTY PRODUCTS IN THE BRANCH PREMISES, NOT ALLOWING SALE EXECUTIVES TO SIT IN BRANCH AND BRANCH MANAGER SHOULD NOT HAVE ANY TARGET OR REVENUE INCENTIVE, PROMOTION,GIFTS,PERKS ANY PRESSURE TO SALE THIRD PARTY PRODUCTS
Dayananda Kamath k
1 decade ago
when third party products are allowed to be sold the regulators have not bothered about the structure that is to be kept in place to adhere to the norms. just by a signature they allowed banks to do all these irregularities. even when the matter was brought to the notice of the regulator their attitude was casual reckless as finance secretary rightly said. unfortunately his ministries attitude is also the same. it clearly shows it is a conspiracy to loot the the public money by design create a new product allow it to be abused for the benefit of the few from their favourites and wait for the public outcry. then ban it make a scapegoat of an innocent and open a new avenue again. this what is being done for the last 60 years.
Ashwin S Anand
1 decade ago
Act on it.. just don't talk !!!
Debadatta Das
1 decade ago
When banks started selling insurance product, the finance market got spoiled. Because everybody knows about the return on insurance product. If a person required insurance then he/she must opt for term insurance, but in our country the insurance is a mix of insurance and investment. The worst thing is that unit link insurance where the customers are getting negative returns.For the entire economical problem all the regulators are equally responsible.
Gopalakrishnan T V
1 decade ago
Banks should be advised to do banking business with all seriousness and commitment. Staff should have thorough knowledge of banking products first and they should also understand the customers needs. It is time they concentrate on banking ie taking deposits and lending to genuine production and consumption needs with the required safety norms in tact.Will the Regulator ensure this?
Suiketu Shah
1 decade ago
The great thing is lakhs of readers of moneylife are aware to stay far far away from these dubious mutual funds,Z grade equirty products,insurance policies, etc promoted heavily by banks,etc all thanks to moneylife.It saves the hard earned money of lakhs of people who otherwise would have fallen to the nonsense talks og banks.Great great work by moneylife.

arun adalja
1 decade ago
rbi must penalise the banks with heavypenalty if they do other activities than banking and give good customer satisfaction.
Ravindra
1 decade ago
I suppose RBI is supposed to tell the Banks what to do and what not to do. We see this in the Newspapers frequently. And here is a RBI Dy Governor who, instead of using the powers that RBI has IS REQUESTING Banks not to indulge in Insurance and other third party products. It sounds funny to say the least.
Vikash Agarwal
1 decade ago
Manoharji... pls do not take the banking 50 years back.... today whatever we are getting in terms of financial offerings, technological convenience both for internet banking (SB and current account services through online debit / credit card, ATM)& capital market services (Demat, equity, IPO invesment through ABAS, Mutual funds)... all is possible only because some bank has taken initiative beyond debit / credit.. The real issue is how matured our banks and regulators are in terms of managing the risk associated with the development in BFSI space. Lets take constructive instead critising the development because of our failure to regulate, govern and take corrective measures pro actively.
manohar bayyaram
Replied to Vikash Agarwal comment 1 decade ago
Vikashji, i appreciate your view. My only concern is when a account holder walks-into bank the innocent investor is trapped to buy the fancied insurance policies and mutual fund schemes. Let the regulators put an end to this.
Ubaldo C DSouza
Replied to Vikash Agarwal comment 1 decade ago
You're right on! But regulating and taking corrective measures will be trodding on the toes of 'vested interests'. That is where the problem lies.
SuchindranathAiyerS
1 decade ago
I like the convenience of being able to purchase financial products through my Bank. As for the reputational risks, that is what needs to be addressed rather than the business itself. The shabby, unregulated way, in which Banks accept, for the purpose of lending or investment, deposits of money from the public, repayable on demand or otherwise, by cheque, draft order or otherwise, endangers the reputation of Banks too.Particularly with knee jerk panic measures introduced by India's idiotic "governance" Should Banking be put an end to?
Ubaldo C DSouza
Replied to SuchindranathAiyerS comment 1 decade ago
Certainly not! But it appears that "India's idiotic governance" is incapable of regulating its institutions, something akin to parents being unable to control the children they beget. If all was well controlled and regulated as it should have been, these issues which we spend so much time in dissecting and bisecting would not have been there. But it is also to be remembered that when compliance is sought to be implemented and enforced, 'vested interests' raise their ugly head and it is the common non-crooked aam admi who picks up the tab.
Vikash Agarwal
1 decade ago
Guys... pls understand the issue correctly, there is no harm in banks selling third party product, provided they understand clients risk profile, offer them advisory services purely based on their portfolio, long term financial planning and financial goals in life. The issue of mis selling comes only when greed among clients overlap their risk profile and banks fill the gap by offering high commission products without understanding clients actual requirement and their risk profile. Hence, we should be asking the regulator to come out with guidelines for banks who are interested to sell TP products with proper due deligence, transparent practices, proper risk assessment by competent staff (with due certifications etc) and relevent disclosures.
manohar bayyaram
1 decade ago
GOOD MOVE : Innocent Bank Account Holders will be saved from the Banks mis-selling. They have ruined the hard earned money of the small investors, there are many instances where the banks lured the account holders to withdraw the money from the fixed deposits and buy endowment policies of the insurance companies. Let the Bank do at what they are good at i.e. debit credit not more than that.
Dekho ji.com
1 decade ago
Yes, 100% agreed. When banks start selling other products, this leads to huge mis-selling opportunities in the name of targets set by the bank's management. Ask any banker and he will tell you how their boss and management force them to sell these unknown products. Even 12th pass kids are being employed by banks these days to sell insurance and stock market linked products. Providing insurance (money/life/etc) should be duty of the govt and private industry should be kept out of this business completely.
Naresh Nayak
1 decade ago
Finally the regulator gets it right. Banks cannot sell third party products. Full stop. Universal banking which was touted by Chuck Prince of Citi and K V Kamath of ICICI in India has turned out to be a conflict of interest model. Chuck Prince himself today is against Universal Banking as a model.

So when is the RBI going to get the bank license granting right? NBFCs which are meeting all prudential norms and are sufficiently large should be compulsorily made into banks first, the rest should not get greenfield licenses. They should first qualify the minimum grade of portfolio quality, wide distribution of branches, capital adequacy and reputation with various stakeholders and then the branch licenses should be granted.

http://nareshnayak.wordpress.com
Array
Free Helpline
Legal Credit
Feedback