Banks don’t mis-sell financial products in India. That is the conclusion we can draw from the annual report of the Banking Ombudsman (BO) for the year July 2017 to June 2018, where a tiny 0.4% of the total complaints made to the Ombudsman were related to mis-selling. This means that 654 banking customers in India complained that they were mis-sold by their bank. Overall too, very few Indians have a complaint about their banks—of the 700 million plus Indians with bank accounts, just 0.02% complained at all. Remove the inactive and dormant accounts, but still the percentage of people complaining at all is under 1%. But did you know that India was probably the only country where there were no complaints against mis-selling before 2017-18. The Banking Ombudsman only entertains complaints that it has defined in the categories or grounds of complaints; so if there is no category, there is no complaint. In an inter-regulator meeting in 2016, Reserve Bank of India (RBI) officials proudly said that banks did not mis-sell—see no complaints. If you don’t admit such complaints, it does not mean there are none. The attitude of not wanting to find the problem defines the RBI and the BO approach to consumer complaints in general and mis-selling in particular.

2017-18 was the first year in which ‘mis-selling’ became a head under which complaints could be made and the first year harvest of complaints is a bit ridiculous. This number is being subjected to widespread disbelief (and ridicule) by policy wonks, academics, banking staff themselves in private conversations, personal finance writes and consumer activists. Imperial College London professor Tarun Ramadorai, who was also the chairman of the Inter-Regulatory Committee on Household Finance constituted by the RBI, says that there is likely to be self-censorship amongst the poor and less-educated since they don’t have the time or the ability to file complaints. “Only the most egregious complaints usually see the light of the day. It also depends on what definition they use of mis-selling."

There is other evidence that there is widespread mis-selling, especially in Indian private sector banks. A paper I wrote with economist Renuka Sane, published in Journal of Comparative Economics found that private sector banks recommended the highest fee product, no matter what the customer asked for, while public sector banks would largely recommend only bank deposits. A survey carried out by Money Life magazine found that over 90% of those surveyed thought that they had been mis-sold and a huge 83% said that they were forced by banks to buy life insurance products. You can read the report here. Says Ramadorai: “Try doing a survey of the banked population, the results would likely be rather different".

The two mis-selling cases listed in the BO report are familiar to all those who have been cheated, mis-sold or those who have done the mis-selling or those who report and analyse this space. In one case the bank debited the account of the complainant for 11 insurance policies for a total sum that was higher than the income of the customer. The bank and insurance company pushed back saying that the customer had agreed to this sale. The BO decided in favour of the customer, but is this not a red flag for RBI and Irdai to check what kind of suitability protocols banks and insurance firms are following that allowed the sale of 11 policies and for a premium amount that is higher than the total income of the person. In any other jurisdiction this was a gross violation of the suitability regime and the license of the vendors would be cancelled. In India, they just collect their bonus, and go on to make another sale at another bank if the current bank fires them.

The other case is also typical of sharp insurance sales through banks. In this case, the bank sold a fixed deposit seeker a life insurance policy by misrepresenting the facts of the product and the customers personal details. The customer had a one-time infusion of money and wanted to buy an FD. He was sold a five year premium paying life insurance policy. The Ombudsman decided in favour of the customer who was also paid the kingly sum of 10,000 for his trouble.

Several things need to happen for stopping mis-selling through banks. RBI needs to catch the complaints and the crime better. It needs to have the will to do this. There has to be a much better definition of the word ‘suitable’. Unless suitability is defined, sellers will keep getting away with murdering people’s savings. Third, unless banks are penalized heavily for fraud and mis-selling, there is no incentive to behave better.

Monika Halan is Consulting Editor at Mint and writes on household finance, policy and regulation

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