A Bank is an institution we all use. Most customers have also developed a fondness and trust in their banks and their bankers, over time. So, apart from the usual banking, customers also borrow money for buying a home, buy gold coins, source insurance, Mutual fund schemes, NCDs etc.
Universal banking as it is called was supposed to be an idea whose time has come, what with the bank branches being present in most parts of the country. That was the thought process…but, went awry somewhere along the way.
What has now happened is that banks find that the other income from non-banking operations to be far more profitable and are less risky, than banking itself! The non-banking income has become a very significant contributor to the bottom line of banks. Product distribution is one of the major contributors to this other income. But that has thrown-up some problems, along the way.
Information used for the wrong purpose
A customer comes to a bank because they want to do banking transactions. They are not coming to the bank because the bank sells insurance! Hence, the information of such a banking client should not be used for any other purpose. However, the banks use the information of how much they have in their account to pitch business to them, on other products they sell. They also know where the customer is investing or where the customer’s money is going. This gives the “Relationship Manager” a clear view of what the customer is doing & his/her overall financial position. This information is used to pitch products.
This is principally wrong. Unfortunately, the regulations that have come in till date, have not addressed this aspect at all. Even the latest Investment Adviser Regulations 2013 by SEBI, allows Banks and other entities to segregate their business of advisory and distribution into Separately Identifiable Division or Department ( SIDD). But, it is silent on the bigger problem, which is at the root of wrong selling, which is access to privileged information.
Separating financial product distribution from the Bank
The solution to this is pretty simple. On one hand there is the bank, which focuses on the core banking function. Then, there would be a different & separate entity for distribution, with which it cannot share any customer data. Only that will ensure that the banking data is not misused for selling other financial products. This is what will constitute a true arms-length relationship.
Strong-arm tactics in banking transactions
Banks also have been arm twisting customers and getting customers to do things which they did not want to – like insisting on a chunky FDs if they want a locker, insisting that they take an insurance from them if they want a loan etc. This tantamounts to coercion. Each service should be appropriately priced and the customer should have the freedom to opt for that service, which is appropriate to him/her. Bundling services, if they are allied and useful add-ons, is fine. But buying another service should not be a precondition for providing a service a customer needs.
Some charges are usurious – like a cheque return. Banks charge anything from Rs.150 to a over one thousand rupees! Charges should be based on the basic costs involved and should not become a source of other income!
Stringent penal clauses for misleading clients
Banks have armies of staff in sales who interface with customers, sell and move on. Customers find that they meet a new “Relationship Manager” every 12 months! These RMs have high targets for each category of product and cash incentives for achieving their targets & are rewarded with promotions for such performance. The RM knows that s/he will not be there after a year and hence do not have a long-term view of client relationships. All this becomes a breeding ground for mis-selling.
Regulatory action needed
Banking reach is good. But, there are problems which we have discussed. Reach alone cannot be the criteria to allow banks to distribute financial products. RBI needs to come up with an appropriate enabling regulation to facilitate separation of banking and product distribution entities, to curb misuse of customer data & mis-selling.
RBI most certainly would be aware of the strong-arm tactics banks use to cross-sell their products. Even their own employees would have experienced this, at one point or another. Strong action needs to be taken to protect customer’s interests and the regulator needs to bring in stringent, enforceable rules, where such subterfuge is illegal. Also, there needs to be a clear mechanism of grievance redressal, which penalizes the wrong doers and is time bound.
Regulators need to wake up to the problems that exist at the ground level and facilitate delivery of good quality services with sufficient protection to customers and a redressal mechanism that works.
Customer protection will then be truly underway!
Customers wake up
It is important to understand what banks are doing to you. Deal with them for banking needs. For any other needs you can most probably get superior advice and service elsewhere. It is after all your money!