What’s so special about Panipat or Noida, or some parts of Punjab? For some it is home, for others these may be places they pass through, the same old crowded roads with slow moving haphazard traffic, the livestock on the roads. Still others may place them vaguely in north India. Others couldn’t care less. But there is something about these places, and several others across India, that is throwing up red flag after red flag. Take the case of Panipat. Some life insurance firms subject proposals for this (and many other identified cities and districts) with extra care when issuing policies. Say the word Indore and the capital market regulator sits up to notice investment advisor activity with greater scrutiny.
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.
We complain about the AC being too cold. Or the coffee machine spewing drain-water. The lifts are slow. The benefits shrink. The increments thin. We groan about Monday mornings. But take that job away and there is sudden sound of silence. The routine is gone. The reason for getting up in the morning is alarmingly not there. And the monthly ding on the phone that announces the salary credit is eerily missing. Over 16,000 jobs have vanished overnight as Jet Airways suspended operations on 17 April 2019. More than 16,000 families of the Indian mass affluent will now struggle with rent, EMIs, school fees, groceries and premium payments. The writing has been on the wall for months of impending doom, and many families were already dipping into their savings as salaries have been delayed for a few months. How to handle this crisis? Do you have a sudden job loss protocol in place?
The year 2018 was when we all learnt some hard money lessons. We learnt that stock prices that go up very fast can zoom down too. We learnt that debt funds are not fixed deposits and returns are not assured. We learnt that real estate revivals can take years and years, and 2018 was not that year. We learnt that governments can change the rules of the game around taxation making it better or worse for you. 2018 was the year in which we learnt the meaning of risk.
There were four kinds of risks that we took home this year. First, the risk of chasing high returns. Many of you may be holding a portfolio that has mostly small- and mid-cap funds. That’s because you saw the 40% plus one year returns in 2017 and went all out to harvest that return. I can remember plenty of conversations with first-time mutual fund investors who had jumped right into the deep end with all their money in the risky part of the market. Warnings would fall on deaf years as the return chasers thought the SIP was their safety belt. 2018 saw a bloodbath in both the mid- and small-cap categories. Investors are staring at an average loss of 12% in mid-caps and around 18% in small-caps. The worst small-cap funds have lost almost a third of the invested value—or ₹1 lakh has become ₹70,000. If you had your entire money in small- and mid-caps, your portfolio is bleeding. But if you had a mix of large-cap, multi-cap and ELSS funds, the red will be less stark. Just buying last year’s winner is not a good strategy for mutual fund investors. 2018 told us that. Understand what a ‘diversified portfolio’ means and implement it in your money box.
eading the Irdai (Insurance Regulatory Development Authority of India) draft on updating regulations for unit-linked insurance plans and traditional policies, you get the impression that somebody gave an aspirin when what was needed was a heart surgery. Product structures in finance are taking on a new importance globally because mis-selling and unsuitable sales can be reduced by taking the tricks and traps out of these products. This simply means that the costs and benefits are better defined and marked so that investors are able to understand the features of the products properly. Product structure rules also deal with early exits and their costs so that investors are not trapped in products they buy.
Both anecdotes and data seem to suggest that Indian health insurance polices that are bought by us as individuals don’t pay up as much as they should. As we listen to the stories of our friends and family about the run around given by hospitals and medical insurance firms to pay up claims of a hospital bill, we quietly send up a prayer—please let me not be the one whose claim is rejected if I ever need to use my policy. There is increasing distrust in the medical insurance market for privately bought covers. Covers bought by corporations, called group covers, seem to have less problems of claims getting rejected.
The anecdotes are supported by data. A May 2018 working paper, titled Fair Play in Indian Health Insurance has done a deep dive into the sector. The big findings are two. One, claims are not paid as much as they should be. Two, India has the highest complaints rate when compared with other countries.
For the more than 25 crore policyholders of Life Insurance Corporation of India (LIC), the LIC-IDBI Bank headlines are very upsetting. LIC will use up to ₹ 13,000 crore of policyholder money to buy up to a 51% stake in IDBI Bank, an asset nobody wants to touch. With stressed assets of ₹ 55,588.26 crore and bad loans a huge 28% of the total loan book, IDBI Bank is probably the worst of the bad banks of India. With its own paid-up capital at just ₹ 100 crore as on 31 March 2017, LIC will use policyholder money entrusted to it to make this equity investment.
LIC has been the gilt-edged long-term safety net for most of post-Independence middle India. “LIC kara lo” is a refrain heard in Indian homes the minute the first salary of the young adult of a family begins to come in. There is public anger when this security of savings comes under threat. There are lots of reasons the policyholders are worried. They are worried about the safety of their money—what if the entire money goes down the drain. They are worried about this being a precedent to more such toxic asset purchases. They are worried about the haste with which the insurance regulator has interpreted a rule to allow this sale—insurance firms are not allowed to hold more than a 15% equity stake in a single firm to prevent concentration of risk.