Two things happened in the last week that seem not to be connected but should be. The Citibank fraud bubbled up through the mud and more quietly the Financial Stability and Development Council (FSDC) had its first meeting. The first is a tiny example of what is wrong with the banking sector in India and the second may be a vehicle that could solve this. Though frauds can take place anywhere and in the best-regulated environments, the Citibank case points to issues other than fraud. Step back from the immediacy of Rs300 crore siphoned off by a suspected rogue employee (and we’re not really sure if that is true—how could an individual do this without even one compliance officer seeing a red flag?) and I see the problem in the banking sector as twofold. One, the government is the largest single owner of banks in India and, therefore, any reform that will shake status quo is very slow to take place. Two, the banking regulator sees its job primarily as a banker to the government with large macro goals and with the other major goal being to prevent bank failure. While this goal set may have worked well two decades ago, a third needs to be added, and very quickly, which is to protect customers from fraud and mis-selling of financial products.
Over the past two decades, an increasing part of a bank’s income is beginning to come from non-interest sources that include commissions, brokerages and other fee-based incomes. Brokerage, for example, makes up about half the non-interest income. The bank, as the holder of depositors’ funds, finds it easy to move money into financial products, as the customer is almost captive. Then there is the whole tradition of trust in banks that Indians have—to keep money safe, we put it in a bank. And when that trusted banker asks you to invest somewhere, you believe him.
But this is the place where the old system is breaking down and the new one is taking time in coming. The checks and balances needed to provide a safe environment for selling financial products and services are not in place. The Citibank case showed that clearly. And if these are not in place for such a large-ticket fraud, it is unlikely that much smaller cases of individuals getting sold dubious products either through miscommunication or outright fraud (forging signatures, swapping a fixed deposit application with that for a high-commission earning product, manufacturing rules that mandate buying high-commission products before a locker can be got or a loan or money transfer from abroad) are even in the radar of the regulator. A small dipstick survey will show the regulator how widespread the problem is in this space. But at the moment the willingness to step into this new role is missing. All my interactions with various levels of the regulator have ended in a hand-over-ear approach—if I don’t hear this I don’t have to do anything about it.
Most financial products sold by banks are manufactured and regulated outside the banking sector, allowing banks to remain in a regulatory crack, removing the need for even basic hygiene in product sales. A part of the mandate of the FSDC, set up in the shadow of the regulatory battle between the capital market and insurance regulators, is to sort out issues that fall into such cracks. It finally takes a scam with many zeros to get the government and regulators to wake up. We have the newspeg in place with Citi. The FSDC has had its first meeting. The next step needs to be the setting up of financial seller and adviser regulations as a priority.
Endnote: I can’t resist it. Even though a full handbook will be with you on Friday with what we think this year will mean for your money, here is some more stuff. Ignore the noise. Every year the world comes to an end many times. Every year is the worst year since the beginning of history. Every year some disaster comes that is bigger than anything ever before. But mankind has managed to move forward despite all these disaster stories and doomsday predictions. This was brought home sharply when I watched this fantastic BBC Four video (http://bit.ly/fOGNAN) titled 200 Countries, 200 Years and 4 Minutes. On two parameters of per capita income (plotted on the x axis) and life expectancy (plotted on the y axis) the world was poor and sick 200 years ago, with low levels of per capita income and a life expectancy less than 40 years. By 1948, Europe, America and Japan were rich and healthy but Africa and Asia are still poor and unhealthy. The last 60 years have seen these move towards the middle quadrant of better income and health. The long-term trend line is for the entire world to move to the top right quadrant of rich and healthy. India is still in the middle and has 20 years of fast growth before we mature. Ignore the scams and noise. Choose good funds and just salt it away. Mail me in 20 years to tell me the zeros in your pot of money.
To read all of Monika Halan’s earlier columns, go to www.livemint.com/expenseaccount
Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and can be reached at email@example.com