In the second episode of the SimpleMoney podcast, we featured a segment about the grave reality behind the irksome telemarketing phone calls and offers we get from banks for insurance policies and a variety of financial schemes. Each of these promises a lucrative future that often feels too good to be true. And usually, it is. As we explored in this blog post, advertisements for financial products can be misleading and can feed off the lack of awareness that an individual might have.
The reason for placing trust in our bank managers and financial institutions is because it has been their traditional role to work with customers, and not against them. However, as one researcher, Hemindra Hazari discovered in his decades of study of these institutions, that traditional role is not being fulfilled anymore.
Mr. Hazari is a SEBI-registered analyst who has extensive experience studying the Indian economy and capital markets. He has written incisive insights about the malpractices in some of India's leading private banks for publications such as The Wire .
SimpleMoney spoke with Mr. Hazari for the podcast, and while you can listen to a few snippets from the conversation, here is the full transcript of the interview:
What has led you to do extensive research on how Indian banks are compromising their operational duties to benefit sales?
I have been tracking the Indian banking sector from the early 1990s. I have a keen interest in banking and in analyzing banks. What I have also noticed is that while government banks have a lot of critical media articles written about them in the media, when it comes to the business practices of some of these prominent private banks such as ICICI Bank, Axis Bank, YES Bank and HDFC Bank, there's hardly any critical analysis or critical reporting done.
It's not that there are no malpractices amongst them. It's simply because the media and the very many analysts who cover them absolutely refuse to write anything critical about them, and that is because of two reasons.
The media does not do it because these entities are very big in advertising, and a lot of these media houses' advertising revenue is derived from these financial banks. As for the analysts who do not like to publish anything critical of these banks, it is because, in the brokerage industry, one of the requirements to satisfy and provide services to your clients, is that you have to regularly organize meetings between these banks and your clients. If these analysts write anything critical of the bank, then the bank will refuse to meet with that particular brokerage house, and that means a loss in revenue.
It is because of these factors that you find there's hardly any coverage of anything critical of these banks.
From the side of the banks itself, you talked about how, at Axis Bank, the CEO, Shikha Sharma, changed the management structure when she stepped into her role. But as a whole in India, is there any macroeconomic reason why banks are shedding auditing and operational compliance in favor of sales? Is there something that's pushing this very agressive attitude?
Yeah, most definitely, there is a business strategy here, and that business strategy really came about with the introduction of the new private sector banks in India, and the kind of "branch network" that they built up during the 1900s. What they have done is, in these banks, there is a very high priority given towards the marketing and sale of financial products, essentially third party financial products. That means the bank is involved in the selling of mutual funds and insurance schemes. Usually each of these is a separate company within the hold of the bank.
It has led to very stiff sales targets being given to the Sales heads. They try to persuade the customers of these banks to buy into these products. And many a time, the customers of the banks are only familiar with the basic bank deposit product. They are not always very well-informed about the intricacies of life insurance products, for example. So these banks take advantage of the financial illiteracy of their customers to missell these products.
I have writen extensively on how the misselling of life insurance by banks has reached enormous proportions. Unfortunately, even though it has been brought to the notice of the banking regulators, the insurance regulators, and even at times the Prime Minister's office, I really don't see any major action being taken to really stop these practices.
This is what needs to be highlighted - that there is a lot of misselling going on. There is a lot of fraud going on.
The regulator is aware of what is going on but refuses to take any action against the senior management of these companies.
Let me assure you that this is not the work of rogue employees. This is a management strategy to achieve certain targets so that the top leadership can get higher salaries and bonuses and when they are listed on the stock exchange, they get higher stock options.
This is the great evil today - that it is the stock options and the remuneration structure of the senior management that is really driving all this misselling that we are seeing today.
As someone who has extensively studied this, what advice would you have for everyday investors?
You have to be extremely careful. You should not sign on anything immediately when the salesperson at the bank comes to you. Think over it and discuss the product with some people they know.
Recently, I have written extensively on the misselling of ICICI Prudential Insurance products in the state of Rajasthan, where a bank staff has fraudulently forged a signature of these customers. These customers thought that they were opening a bank account with ICICI bank, and to their horror, they realized later on that actually, the bank's staff had misled them totally and had opened a life insurance product of ICICI Prudential, which is a separate company altogether.
This is the kind of fraudulent practices that have been documented. Now, we have the Rajasthan Police investigating it.
You have to be extremely careful when you start dealing with banks. It is most unfortunate. Normally we expect a bank's staff to be the upholders of honesty and integrity, but unfortunately this sales culture has totally corrupted the system there.
If ever anyone approaches you, please do not sign anything immediately, and whenever you have to sign a cheque, please take advice, and please do not sign any blank cheque and give it to the staff of either the bank or to the staff of the insurance companies.
As a long-term solution, what needs to happen to eradicate this problem?
The only long-term solution is that the regulator and the police, when such practices are found, place very strong police cases not only to the junior level of the bank's staff, but to the seniors in the bank as well as these insurance companies. It is they who are instructing their staff to carry out such practices.
Unfortunately, in India, I really don't see the regulator taking any stringent action, which is a very sad state of affairs. The onus of responsibility today is entirely on the customer who has to, on his or her own, check if there any fraudulent practices going on or not, which is really the job of the regulator.
Even when these instances have been brought up and been documented, the business media in India refuses to give any publicity to this. That's why you find whichever articles that do appear on this appear in the independent press like The Wire and Scroll. You rarely find business media taking up these cases. You very rarely find analysts who cover some of these companies extensively ever talking about it. It appears that the entire system is against the poor customer.
This can't be an easy job, putting yourself up against powerful institutions. Why do you continue to do it?
See, let me tell you, some of the whistleblowers in these companies face very hard challenges. ICICI Prudential in Rajasthan had actually put up a fictitious case against a whistleblower for thirty days, without any evidence. Finally, the High Court rescued him, mentioning that there was no evidence to warrant taking him into police and judicial custody.
So the forces one is up against is tremendous. Therefore, it is only people who are genuinely interested in public welfare who do what they do, like this whistleblower. Most whistleblowers are fired from the company, finding it hard to find another job in the industry. They have no career left. This is a lesson that companies teach their honest staff - that this is what will happen to you if you expose us. We must thank the whistleblowers who help expose these practices.
Scrutiny should come under good corporate conduct and journalistic ethics require that we cover this. This work is something that analysts such as myself should always be doing. One has to be extremely careful, because there's noone to even expose these practices, let alone punish them.
Do you have hope that this will change soon?
No, I do not have much hope because it is only the independent media, independent analysts and the whistleblowers who are speaking about it. The mainstream business media has totally compromised itself. These are the individuals that society depends on to expose such issues. It is an uphill task.
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