Department of Financial Services (DFS) has been regularly getting complaints that fraudulent and unethical practices are being adopted by banks and insurance
companies for procuring policies from the bank customers
By Sajjad Bazaz
Banks have fast transformed themselves into ‘One-Stop Shop’, offering you not only personal banking services and products, but also investment advice, third party products such as insurance policies etc. This means you don’t have to wander from institution to institution to shop each area of your financial need. Shopping all the required financial products and services under one roof is of course a delight as it saves you a lot of time and effort.
Banks acting as ‘One-Stop Shop’ is not something new as they have been offering financial products of varied nature beyond their traditional banking products and services through decades. In other words, today the bank branches have been perfectly converted into super financial markets where a customer gets financial services of any nature under one roof. In this ‘One-Stop Shop’ boom, it’s the insurance sector which has got a fillip as banks have been more active to sell insurance policies, life as well as non-life, to its customers at large scale.
With banks acting as corporate agents, there has been a manifold increase in the business of insurance companies. At the same time, it has also been proving advantageous for the banks to scale up their revenue through commission/fee-based income.
A report by the Swiss Re Institute is worth quoting. This Swiss reinsurance company founded in 1863, headquartered in Zürich, Switzerland, is one of the world’s largest reinsurers. In its report, the Institute has picked the expanding economy, growing middle class, innovation and regulatory support as the main drivers of the insurance market growth in India.
“India’s insurance sector is projected to record the fastest growth among the G20 countries with the total premium expected to rise at an average rate of 7.1 per cent in real terms during 2024-28. In comparison, the growth rate for the global insurance market will be around 2.4 per cent,” reads the report.
The report picks the life insurance business to record 6.7 per cent growth during the said time period backed by rising demand for term life cover by the middle-income group and increased adoption of insurtech. the non-life segment is estimated to grow by 8.3 per cent owing to economic growth, improvement in distribution channels, government support and a favourable regulatory environment with health premiums forecasted to rise by 9.7 per cent.
However, amid this insurance boom, all is not well with the bank customers. If customers’ feedback is taken into account, mis-selling of insurance policies is rampant. Even mis-buying of financial products is equally proving a cause of inconvenience to the customers.
A lot of stories galore that narrate tales of mis-selling of financial products, especially insurance policies, to gullible customers by officials at the bank counters. Those who cannot afford to pay the premium of the insurance, are forced to take the insurance cover. There are many such instances when banks have forcibly made the borrowers to obtain insurance cover and most of the time the insurance premium is deducted from their loan accounts.
In other words, the disbursement of loans has been made hostage to insurance products, where banks have been forcing customers to buy specific insurance policies. Some banks even have made it “mandatory” for the borrowers to buy an insurance cover before loan is disbursed. Precisely, what we find are instances of arm twisting borrowers to take specific insurance policies. Some of these are more expensive and serve little purpose to the customers.
Even the Department of Financial Services (DFS) in a recent communication to banks has expressed its displeasure over this arm twisting of customers by the banks as they have been regularly getting complaints that fraudulent and unethical practices are being adopted by banks and insurance companies for procuring policies from the bank customers.
Meanwhile, there are certain basic things to understand while shopping for a financial product.
What is mis-selling of financial products?
Mis-selling of financial products is simply completing the sale of a financial product or service in the most deceitful manner. In this kind of selling, the products or services sold to an individual or even to a company do not suit their needs. For instance, a life insurance policy is sold to a bank customer who has no dependents. Here, the insurance serves no purpose to the customer and only profits the insurer and the bank.
In mis-selling, the financial product is materially misrepresented as something that it is not. The customer is intentionally misled as the officials either give incomplete details regarding a sale or provide a set of false information.
There is another way of mis-selling the financial product. An unsuitable financial product or service is sold to a customer.
What is mis-buying of financial products?
Mis-buying of a financial product happens when you take the route of a financial scheme or service which does not suit your needs. It usually happens when you invest in a scheme or buy any other financial product or a service without understanding its features and suitability to you. You invest because someone has recommended it to you.
In other words, we usually find that savers make dozens of mistakes while investing in a financial scheme – partly because they are careless and partly because we humans find it hard to deal rationally with money. Commonly, they buy a scheme without understanding its features, or risks associated with the investment. An element of greed or too trusting nature also results in mis-buying of a product.
Unfortunately, mis-buying is not accepted by an investor and very easily tends to pass the buck on to financial intermediaries who sell financial schemes.
Actually, nobody expects bad things to happen. But in financial matters, this optimism is counterproductive. Investors buy on the expectation of better returns, but without taking into consideration the negatives. People find it useful by moving in herds for survival, but this herd mentality has disastrous consequences in financial matters.
How to avoid mis-buying financial products?
The basic prescription to prevent mis-buying is literacy. When you intend to buy a financial product, it’s necessary for you to do your homework before buying the product. If you are not able to understand the features of the product, don’t hesitate to consult a financial expert or the staff at the operational front in a bank to understand the product.
Here, the financial institutions who sell these products are under obligation to spend some time on educating the customers. They should not feel shy to disclose probable negatives of the financial products, especially insurance schemes.
In short, you should not buy a product unless you have understood it fully. Don’t fall prey to the greed of handsome returns.
Is it mandatory for a borrower to take a life insurance policy offered by the bank?
Banks cannot force borrowers to buy a life insurance policy or any other non-life policy while granting a loan facility. It’s illegal. The Reserve Bank of India (RBI) “best practice” guidelines don’t contain any mandatory directive to offer insurance with loans. In fact, banks have been advised by the regulator not to force their customers to purchase an insurance product. Even the directives are clear that the banks cannot adopt any restrictive practice of forcing its customers to go in only for a particular insurance company in respect of assets financed by the bank.
The directive reads that customers should be allowed to exercise their own choice. There should be no ‘linkage’, direct or indirect, between the provision of banking services offered by the bank to its customers and use of insurance products.
Under all circumstances, the bank has to seek your consent to bring you under the umbrella of insurance. In this regard, it’s your will that has to prevail.
One can lodge a complaint to the high-ups of the bank and even to the Banking Ombudsman.
Notably, Department of Financial Services has also conveyed to the banks that the Central Vigilance Commission (CVC) has raised objection, as incentives for selling insurance products bring not only pressure on the field staff but the core business of banking also gets affected and quality of advances may get compromised in the lure of commission and incentives for staff.
(The author is former Head of Corporate Communication & CSR and Internal Communication & Knowledge Management Departments of J&K Bank)