Banking Central | Indian banks finally wake up to problem of mis-selling

SBi

This month, some state-run banks issued internal circulars asking their senior executives not to conduct business conclaves, seminars or felicitations till the end of March. The first to do this was the State Bank of India, which on January 2 barred all its senior employees from holding business conclaves, seminars, or felicitation functions till March 31. Indian Bank and Bank of Baroda issued similar circulars in the following days, as Moneycontrol reported.

Why did the banks do this? The basic idea is to prevent selling insurance and mutual fund products in campaign mode. Such campaigns typically involve rewarding executives who sell the maximum number of such products with gifts or other perks, indirectly encouraging forced selling or mis-selling to customers. Banks have a habit of rewarding aggressive salespersons and punishing those who fail to meet targets.

Banking Central

The pressure to sell insurance products and mutual fund products comes from the top management level down to bank branches. Often, the target customers are not adequately apprised of the risks associated with such products, which leads to mis-selling. Also, the issue is not only about products such as insurance and mutual funds.

Former Yes Bank executives allegedly sold Additional Tier 1 bonds to fixed-deposit holders, pitching them as ‘super FDs’ (products with the safety of an FD and a higher rate of return). AT1 bonds are typically issued to increase a bank’s core equity base. Eventually, retail investors found their money stuck in these instruments when the bank wrote down the AT1 bonds during the bailout.

There was also the issue of HDFC Bank executives allegedly force-selling GPS products to auto-loan customers. In May 2021, the Reserve Bank of India penalised the bank, imposing a Rs 10 crore penalty.

An examination of documents in the matter of marketing and sale of third-party non-financial products to the bank’s customers, arising from a whistleblower complaint to the RBI regarding irregularities in the bank’s auto loan portfolio, revealed contravention of the law and regulatory directions, the RBI said. The bank acted against the erring staff later.

In 2023, there was a viral video of a private bank official scolding his junior staff for failing to meet insurance sales targets. It eventually led to punitive action by the lender. Under such toxic culture, junior employees are forced to sell products to clients that may not be suitable to them.

In this backdrop, it is encouraging to note that some banks have taken initiatives to curb miss-selling of products. The directives from some of the large state-run banks could set the tone for other banks to follow similar steps and hopefully, these actions will eventually translate to a change in operational culture.

Banks should sell products to customers strictly based on the latter’s needs and not to meet sales targets. Period.

(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)