It takes as much time to get from the airport in Bengaluru to the Indian Institute of Management Bangalore (IIMB) as it does for my flight from Delhi to the city of snarly traffic. I was going to speak to a mixed bunch of students at IIMB later that day and to pick me up was a first-year MBA student. The journey was long and before long we were deeply immersed in the tricky topic of gender. I was curious to know how the gender equation has changed for a generation that was born after I had graduated from college. I remember the faces of all the girls in my class, both in undergrad and postgrad, who were married off before they finished the degrees. Those who survived the ceremonial kick-off got into jobs and then into married life. They spoke about doing two jobs—one at work and the other at home. The Indian marital household that sits in the top 1% of the population in education and wealth was happy to accept a “working” woman and her income, but did not like it when work got in the way of the household chores and duties.
A recent story reports on mis-selling and fraud by a bank in rural Rajasthan where they allegedly made bank deposit customers put their signatures on life insurance products of a group firm. While the story of people of small means being cheated out of their money is worrying enough, what is of greater concern is that this problem is not limited to one insurance company or bank, or location. Life insurance mis-selling and fraud by bank branches is systemic in the country. The evidence to this statement comes from three sources. The first is anecdotal: almost everybody who has a bank account has a mis-selling or fraud story to tell about life insurance. For those who superciliously turn away from anecdotes, there are three academic papers that nail the problem. In 2014, two economists and I, wrote a paper estimating that policyholders lost over Rs 1.5 trillion from mis-sold life insurance plans between 2007 and 2012. In 2017, I published another paper that mystery shopped bank branches to catch mis-selling. I found that bank officials lied most of the time on features around costs and costs of early redemptions to potential customers. A 2015 paper by Anagol et al find that agents overwhelmingly recommend life insurance products that are unsuitable to the customer but get the agent high commissions. Three, two government committees, Swarup and Bose, have found life insurance to have very high front incentives that cause sharp sales and fraud. (Disclosure, I have served on both the committees).
The debate around the Financial Resolution and Deposit Insurance (FRDI) Bill is good news. The citizens of a country must engage with a potential law that affects their money. I wrote on the issue last week, where I argued that the FRDI Bill proposes an early warning system for crisis in financial firms. You can read it here. Based on their financials, banks and other financial firms will be classified according to their risk. When the risk becomes more than moderate, a set of data reporting protocols kick into place, giving the system ample time to prevent the bank (and other financial firms) from failing. If it indeed does fail, there is a process-driven system for mergers and take-overs. It is only when all of this fails that a bank goes into liquidation. It is like getting a warning 10 miles before the train hurtles towards a cliff.
Bank deposits are the one true friend of a middle class Indian and any threat to their safety is terribly upsetting. The government will introduce a new bill in Parliament in the winter session called the Financial Resolution and Deposit Insurance (FRDI) bill. One section of this bill is causing bank depositors to fear for the safety of their money. I read the bill over the weekend and this is my understanding of what the aim of the bill is and what it means for you.