Cross-selling of insurance schemes in contravention to the standing rules needs regulators’ attention
Sajjad Bazaz
It was a dream come true when in the late nineties banks embarked upon a mission to convert their branches into one-stop financial super markets. The banks started providing all third party financial products/services, be it insurance schemes, mutual funds or any other financial schemes outside the ambit of the banking system, to their customers under one roof. The core concept of offering third party products at bank branches was customer convenience as it was based on the premise that customers won’t be required to wander in search of other financial products/services not falling under the ambit of the banking system.
Over a period of the last two decades, this cross selling of financial products through third party product window became a reality. We witnessed a host of tie-ups between banks and other financial service providers. These tie-ups offered a host of financial products to the customers at a single point. Since the banks are considered as the most trusted institutions when it comes to dealing in money matters, the customers without any iota of hesitation started shopping third party products such as insurance schemes, mutual funds, etc. through the banks. When we go by the concept of shopping all financial products/services under one roof (at bank branches), it of course relieves the customers of inconvenience as they do not have to waste time and money in hunting for an appropriate financial service provider. For example, a bank has brought all insurance services at the doorstep of their customers through a tie-up with insurance companies.
But with the passage of time, this customer-centric tie-up between banks and other financial institutions, particularly with insurance companies, is proving a nexus where the customer convenience stands marred. Now the third party window is being used to extract more money from customers through unethical and illegal means. For example, it is a common practice at banks now that a customer is forcibly handed over an insurance policy along with a banking product/service. In this segment, customer complaints are widespread. But they feel helpless as nobody listens to their pleas. Irony is that the customer complaints in this regard are set aside without any resolution by the higher authorities as suggestions.
To explain the exploitation by banks in league with other financial companies to extract more business from their customers through mis-selling of third party products such as insurance policies, let me share a few instances narrated by the victims at the hands of their banks.
Don’t be surprised if you are charged a higher renewal insurance premium. It is bizarre to note that in many cases the customer is charged a higher renewal premium in an auto loan than what was charged the previous year when the value of the asset was lower in the current year. I have an instance to substantiate this claim.
Last year, as a precedence, a borrower got his car insurance done through his bank branch which had financed the car. Normally the banks don’t allow their customers to get their financed assets insured through any other insurance company except the one which has a tie-up with the bank. The insurance company charged a premium of Rs 13,214 against the car value of Rs 4.71 lakh. This year the renewal was done by the same company having a tie-up with the bank for a value of Rs 4.03 lakh charging a whooping premium of Rs 21,192.
When the customer pointed out this discrepancy and illogical premium charging to their Srinagar-based office, they failed to justify it and passed on the blame of charging higher renewal premium to some kind of operating software. “It is computer generated and cannot be rectified,” the insurance official said. The customer reached higher officials of the insurance company with the issue.
“Is there any plausible reason for charging Rs 8000 excess than the previous year’s premium when the value of the car is Rs 68000 less than the previous year?” The customer asked. Even the Managing Director of the company didn’t respond. It was only when the customer threatened to raise the issue in the media, the company started bargaining on refund of extra premium charges. First the local executive of the company offered Rs.3,000 refund which the customer refused to accept. After a delay of over two months, the customer was refunded over Rs.6,000.
The above case cannot be an isolated case. It is not ruled out that the insurance companies must be unethically charging higher insurance premiums which usually gets unnoticed by the customers as they totally rely at the mercy of their banks. Here, the concerned bank is also to be held responsible for allowing their insurance partners to resort to this unethical practice, which is simply an act of jointly robbing the customers of their hard-earned money.
If the regulators, the Reserve Bank of India (RBI) and the Insurance Regulatory and Development Authority (IRDA), initiate a probe to look into the cross-selling of insurance products at bank branches, I am sure the nexus between banks and the insurance companies will surface as a big scam. Let the regulators nip the evil in the bud if they are seriously looking to achieve customer convenience and relieve the customers of this widespread menace running in the name of sale of third party products at the bank branches.
Another incident is of a lady entrepreneur who falls in the top customer segment of her new generation private bank. She approached the bank for car finance, which was gladly sanctioned in her favour. When the loan amount was disbursed, she was asked to pay Rs.12,000 towards insurance premium. This insurance premium was in addition to the car insurance which is mandatory as per the banking regulations. Though she paid the money, she expressed her confusion about this extra insurance premium. In reaction to her confusion, the bank officials told her that the premium is one-time and won’t be charged in future. However, it was through an acquaintance that she learnt that the bank had insured her car loan amount through a loan protection policy and that too without her consent. The lady lodged a strong protest with the branch manager and was willing to surrender the loan facility if the amount of Rs.12,000 was not refunded. It is ironic that the bank has embedded the loan protection scheme in its policy governing auto financing and pitches it as mandatory. This is totally in contravention to the RBI regulations which restricts banks to bundle any insurance scheme with their loan schemes.
Banking rules envisage that 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.
Meanwhile, this kind of arm-twisting of customers by making them to buy insurance policies forcibly has direct bearing on the government employment generation programmes. A borrower granted loan under the self employment scheme such as MUDRA is forced to pay hefty insurance premiums at regular intervals though his unit is in its infancy stage as it takes time for such startups to get established and generate a sustainable revenue stream. So even before they start generating income for themselves, the banks in the incipient stage of their entrepreneurship drains out their financial ability by burdening them with a third party product like life insurance schemes.
There is a unique observation in the performance of banks operating in J&K in achieving targets under government sponsored schemes. You will observe that the given targets are mostly achieved. But the performance of most of the units financed under these schemes shows that these units are struggling to survive right from the first day. They have to share more than 50 percent income generated with the bank in the shape of interest component and insurance premium as the insurance policy is forcibly imposed on the borrower. A thorough probe into the affairs of the performance of banks in government schemes will find that most of the borrowers who have availed the loan through government schemes such as MUDRA are struggling in repayment because of their extra financial burden in the shape of third party products.
Why do banks force their customers to buy third party products such as life insurance policies?
The third parties, especially insurance companies, selling their financial products through banks lure the bank officials with huge incentives for selling their products to their customers. Offering foreign trips to bank officials for achieving a particular target in selling insurance policies is a naked truth. Even cash rewards are given to the bank officials for forcibly bundling insurance policies to bank customers.
This kind of unethical practices at the bank branches is widespread and is called a menace by the bank customers. There needs a thorough probe to stem the rot and relieve the customers, especially the enthusiastic youth who have taken route of government employment generation schemes or are eager to bank upon these schemes for generating income through self employment ventures, of this lingering loot taking place by bundling of insurance policies forcibly with loan facilities at bank branches.
(The author is a veteran journalist/
columnist. He is former Head of Corporate Communication & CSR and Internal Communication & Knowledge Management Departments of
J&K Bank).
