Why is it a crime if an employee cheats the bank by opening fake Letters of Undertaking (LOUs) for Nirav Modi, but it is okay to fool a senior citizen into buying an insurance policy instead of a term deposit? Both are equally reprehensible, yet mis-selling of third-party products is routine banking that has official incentives.
Banking is based on trust but Indian banks are characterised by fraud, cheating of customers and lack of accountability. The price is being paid by us, the customers. Unless there are some drastic changes soon, we are in for a phase of great turmoil.
The big elephant in the room — the massive bad loan problems, because the bulk of that money is unlikely to come back. Dr K C Chakrabarty, the outspoken former deputy governor of the Reserve Bank of India (RBI) says, “in my opinion, the total non performing assets (bad loans) are Rs 20 trillion and it has to be resolved first”; as against this, the official estimate if bad loan is just about Rs 8 trillion.
This government, in its fourth year in office has begun to make some progress on the resolution of the biggest loans. It passed the Insolvency and Bankruptcy Act, has prioritised the 12 biggest wilful defaulters for resolution and got the National Company Law Tribunal working. It is too early to say how successful this will be in the long run. As opposed to one acquisition of Bhushan Steel by Tata Steel, almost every other case in being deliberately tied up in litigation. In most cases, the lenders are likely to recover just 20% of their loans. The bigger worry is that our chronic defaulters, who owe banks tens of thousand crores, are busy striking deals to put up dubious front companies to buy back their own companies at a fraction of the price. It is early days yet, but there is a good chance that barring the initial cases that are being monitored by the Prime Minister’s office, the rest may get mired in controversy and litigation.
While the government was still grappling with this giant issue, the Nirav-Modi-Gitanjali scam burst on us and newer cases of jewellers, ball pen makers and others, who have absconded after cheating banks of several hundred crores are hitting the media everyday. The government has responded with the Fugitive Economic Offenders Bill – a draconian new legislation that allows a fugitive economic offender’s property to be confiscated and sold without giving him/her the right to contest the action in court. This still won’t bring back wealthy offenders like Vijay Mallya or Nirav Modi.
While the government and the country are grappling with these two issues, the concerns of bank management, their employees and their customers are different. Banks, especially public sector banks (PSBs), which were nationalised with lofty objectives, are now focussed on selling third party products to earn-fee income rather than core banking operations. This often involves mis-selling of insurance, mutual funds and wealth management products apart from issuing guarantees and letters of undertaking.
Consequently, a customer walking into a bank to deposit money is not offered a banking service – she is sold an insurance policy masquerading as a deposit or asked to invest in a mutual fund. Home loan borrowers are forced to buy insurance from companies that offer the highest fees to banks or incentives to their employees.
Private banks employ relationship managers with stiff business targets who indulge in large scale mis-selling. In PSBs, it is worse. Employees dealing with customers earn special incentives for sale of third-party products and also lured by insurers with lavish foreign junkets and goodies. At least two bank chairmen have told me that any attempt to stop the sale of third-party products is strongly resisted by employees.
Why is it a crime if an employee cheats the bank by opening fake Letters of Undertaking (LOUs) for Nirav Modi, but it is okay to fool a senior citizen into buying an insurance policy instead of a term deposit? Both are equally reprehensible, yet mis-selling of third-party products is routine banking that has official incentives.
The other big problem is the systematic fleecing of customers through a variety of charges, for what should be part of routing banking services (payment for cheque books, for deposits or withdrawals beyond a small minimum number, payment for transaction alerts) etc. The fleecing of borrowers is a different level altogether.
The gravity of this is best explained by a simple video clip going around on Whatsapp. It says, when you deposit your money with a bank, it costs you 3.5%; when you want to borrow from the same bank, the rate is anywhere between 11-13.5%. The difference of 10% is the spread that banks are earning on our deposits. This is the highest spread in the world; in most developed countries, it is as low as 2%. In fact, current and savings account deposits are the most profitable segment for banks, but banks fool us into believing that we need to pay additional fees for every service. All this is fomenting a culture of lies and dishonesty among banks and is increasing our distrust of banks and bankers. This is a serious concern. If we cannot trust a bank, where we park our savings, who can we trust?
Sucheta Dalal is the managing editor of Moneylife Magazine and a Founder Trustee of Moneylife Foundation. She was awarded a Padma Shri in 2006 for investigative journalism.
