Mumbai: Reserve Bank of India (RBI) deputy governor K.C. Chakrabarty on Thursday criticized banks on earning hefty fees by selling insurance cover to their customers.

“I don’t understand why banks should earn so much by selling insurance products. I have heard they earn thousands of crores selling insurance products to their customers," Chakrabarty said at the annual banking conclave of Mint in Mumbai. “Unless you are mis-selling, you are not going to get this kind of income."

The country’s top bankers, including the heads of State Bank of India, ICICI Bank Ltd, Bank of Baroda, Citibank, Standard Chartered and HDFC Bank Ltd, were present at the conference.

Chakrabarty also chided banks on their proposal to limit the number of free ATM transactions permitted even for their own customers. The RBI deputy governor said that with improving technology, banks should be able to offer more cost-effective services to clients rather than pulling back on existing services or increasing the cost of such services for customers.

The Indian Banks’ Association, a lobby group of bankers, had proposed recently to reduce the number of free cash machine transaction to five per month, irrespective of whether the transactions take place at their own bank’s ATM or another bank’s.

“Banks are saying because of new technology implementation, our cost has gone up," Chakrabarty said. “This worries me because it shows you have failed to adopt technology."

Commenting on asset quality concerns in the banking system, the deputy governor said that bankers should be worried about their indebted clients. As the leverage of banks is falling, the leverage of companies is rising, he said.

“If you are not able to stop leverage of corporates, it will remain a big fear," he warned. Stressed loans in the banking system, which include bad and restructured loans, constitute 10% of the overall loans in the system. However, Chakrabarty said that debt restructuring for companies is a legitimate tool.

According to the deputy governor, more banks are needed in the country, not for competition but for banking penetration. “Financial sector can’t solve the real sector problems but can aid it greatly," he said.

Chakrabarty also asked banks to change their credit appraisal process and said only knowing a customer is not enough, a bank should know the business of the customer as well. This knowledge of customers business will lead to better credit delivery system, he said.

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