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Business News/ Industry / Banking/  Customers must ensure financial products are suitable for them: banks
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Customers must ensure financial products are suitable for them: banks

Banks tell RBI that customers must understand their financial needs and bear responsibility for the choices they make

In January, the Nachiket Mor panel proposed a legally-protected right for low-income borrowers to get suitable financial services, suggesting banks can face legal action if found selling unsuitable products to them. Photo: Hemant Mishra/MintPremium
In January, the Nachiket Mor panel proposed a legally-protected right for low-income borrowers to get suitable financial services, suggesting banks can face legal action if found selling unsuitable products to them. Photo: Hemant Mishra/Mint

Mumbai: Banks are not willing to ensure that the products they sell to low-income customers are suitable for them, telling the apex bank instead that customers themselves must understand their own financial needs and bear responsibility for the choices they make.

In January, a Reserve Bank of India (RBI) panel led by Nachiket Mor on financial services for small businesses and low-income households had suggested that banks move from the principle of caveat emptor (let the buyer beware) to caveat venditor (let the seller beware). It proposed a legally-protected right for low-income borrowers to get suitable financial services, suggesting banks can face legal action if found selling unsuitable products to them.

However, when the central bank sought feedback from banks on the recommendations, bankers’ lobby Indian Banks’ Association (IBA) opposed them, saying a change in approach will raise operational issues.

IBA has communicated to the central bank that the recommendations may create “operational limitations" for banks working with low-income group people and in rural areas, an IBA official, who did not want to be identified, confirmed.

RBI did not respond to an emailed query to confirm the receipt and details of the communication.

“In the absence of proper financial data, banks will have to ask for the financial details of the family. From our experience, we have realised that people don’t respond to such searching questions," said a senior banker involved in IBA’s feedback process, who did not want to be named.

“There are no complex products involved when it comes to doing business with low-income households. You can’t sell them derivatives products. Where’s the point of mis-selling?" asked another banker, who declined to be identified.

While the central bank is likely to take the banks’ view into account before finalizing rules, it may not necessarily be sympathetic to their concerns.

Speaking at an event on 20 May, Deepali Pant Joshi, executive director at RBI, had said the central bank was devising strict codes for banks to discourage them from mis-selling financial products to low-income households. Lenders must treat customers fairly and “mis-selling will invite consequences", she had warned.

Comprehensive consumer protection regulations, based on domestic experience and global best practices, are expected to be announced in a few weeks.

While analysts accept that banks do mis-sell across all income segments, they say mis-selling in the low-income segments is not rampant due to the low ticket size of the products.

“I am sure some banks do mis-sell. But more than banks, it is the non-banking financial companies who wreak havoc," said Abizer Diwanji, national leader for financial services at EY India.

“The poor always fall for ponzi schemes of chit-funds. Any code should encompass these non-banking finance companies rather than banks, which don’t have much of a sense of purpose in selling low-ticket products to poor," Diwanji said.

Banks have also argued that they are under-staffed in rural areas, preventing them from conducting anything more than basic due diligence while offering banking services there.

“We are anyway spread thin in lower tier cities. However, if we push the staff there from our head office, risk-averse bank officials will simply stop selling bit complex products like systematic investment plans or even insurance," said the second bankerquoted above.

RBI’s Joshi had, however, argued that it is the banks that must help customers fully understand the features, benefits, risks and costs of the financial products they buy and minimize sale of unsuitable products by encouraging best practices before, during and after the sale.

They “also must ensure that there is a clear specification of liability, if things go wrong", she had added.

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Published: 08 Jul 2014, 11:47 PM IST
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