RBI wants banks to hive off advice. Long shot, won’t work

We’ve had issues with the way our banks sell us financial products. We swap stories at social dos about whose bank sold the bigger lemons. After experiencing one or two toxic products sold by banks, we’ve learned to stop the bank official mid-sentence and just stay with what we want. A joke did the WhatsApp round sometime back where a man runs into a bank, pulls out a gun and screams: “Just open an FD for me. I don’t want an insurance plan or a mutual fund. Just the FD.” We wonder how banks are able to get away with these pervasive sharp sales when there is a banking regulator in place. Well, you need to know that last week, the Reserve Bank of India (RBI) came out with a notification that will deal with this problem of mis-selling. You can read the notification here: http://bit.ly/1Qygiqr.

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The toughest conversation ever

Expense Account, Mint

I’m talking to an old friend. The conversation veers around to ageing parents and he speaks of the difficulty in talking to his 80-year-old father about end-of-life choices, putting his assets in order and writing a will. Over the past decade-and-a-half he says he’s been through various stages—indifference (this will sort itself out), denial (my old man won’t cop it so soon—we come from healthy stock), guilt (what am I doing thinking about the death of my own folk?), worry (gosh, the run-around XYZ went through to get basic bank accounts unfrozen and don’t even talk about the real estate mess) and then courage (I’m going to nail this talk next time we meet) and finally to despair (dad doesn’t want to discuss it!).

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Overdue RBI wealth management guidelines low on deterrence

Expense Account, Mint

The Reserve Bank of India’s (RBI) long overdue guidelines on wealth management and distribution of financial products such as insurance policies and mutual funds by banks were uploaded on its website on 28 June. The guidelines can be accessed here:http://bit.ly/11xD6DZ and comments sent to the RBI till the end of July. The final guidelines will be released thereafter. Although RBI already has rules in place to regulate the sale of third-party products and wealth management services, these are more than 20 years old and out of sync with ground realities of how banks actually advise clients, refer and sell financial products. The new guidelines seem to be triggered by the large-scale violation of know-your-customer (KYC) and anti-money-laundering (AML) regulations by banks as exposed by Cobrapost.com in a nationwide sting (http://bit.ly/1aULAIv) that covered more than 20 banks. RBI’s internal audit showed that such violations were rampant as was mis-selling of financial products.

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Don’t buy funds if EUIN is missing

Expense Account, Mint

OK. So there is one more acronym to remember and deal with. Jostling for space with PAN, KYC and UID is a newly born creature. Meet the little fledgling—it’s called the EUIN or the Employee Unique Identification Number. When it grows up, it will cover the three million sellers of financial products in India. To see why it was born, we’ll have to go back to the 13 September, 2012, circular of the capital market regulator (http://bit.ly/11TWCtu) that laid out the road map of change for mutual fund (MF) manufacturers and sellers. Titled ‘Steps to Re-energise the Mutual Fund Industry’, the circular used carrot and stick to get the industry to do more than chase after the wholesale part of the market. Buried in the section that dealt with the distribution of MFs was a direction to the industry association, the Association of Mutual Funds in India (Amfi), that it should “create a unique identity number of the employee/ relationship manager/ sales person of the distributor interacting with the investor for the sale of MF products, in addition to the Amfi Registration Number (ARN) of the distributor.” And that the MF application form should have a box for the EUIN.

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MLM cleanup should pave the way for Indian Financial Code

Expense Account, Mint

If you drive down from Chennai to Pondicherry, it is not unusual to see a furry, beaked head poking out over a high wall, looking quizzically at the world go by the yard in which it lives. The six-feet bird came as an import from Australia and, unknowingly, became a part of a multi-crore scam in Tamil Nadu that defrauded hundreds of thousands of people. Emu farming promised super normal returns – invest in emu chicks, they get fat on your money and are then sold for their meat and oil, doubling or tripling your initial money. Sounds far-fetched? It may to you, but some Rs.500 crore of real retail money bought the scheme. It isn’t as if people only in the south are gullible; 1,600 kms north of Chennai, in West Bengal, an even larger bunch of people at the bottom of the pyramid collected every rupee they could and invested in real estate deals, teak farms and in products as bizarre as potato bonds that offered to double money in a short time. And it isn’t as if it is the rural poor that are gullible, Indians in urban areas have got burnt taking online surveys or trusting their money to a stock guru for multi-bagger rewards. One newspaper report (http://bit.ly/15TnxY8) puts the size of fraudulent deposit-taking schemes just in West Bengal at Rs.70,000 crore. There is no estimate for the size of the problem across the country but we can conjecture that it will be in trillions and not billions.

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3-6-3 banking costs the poor money

Expense Account, Mint

It is almost as if the seething Indian aam admi is finding one more thing to get furious about—there has been a string of financial sector failures in the past few years that have directly affected the wallets of the average Indian. While the telecom and the VIP helicopter scandals add to the widely held belief that people in positions of power or those who have access to them, are corrupt, these are still far away from directly affecting the everyday finances of the household. But the institutional theft from the wallets of the average Indian is something that hurts real time. And we’ve had plenty of these in the past few years. Speak Asia, a multi-level marketing company, lost more than Rs.2,400 crore of retail money. StockGuru lost Rs.500 crore and mis-sold life insurance products cost Indian investors more than Rs.1.5 trillion. The latest is the collapse of the Kolkata-based Saradha Group where more than Rs.20,000 crore is at risk.

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Blue, yellow and brown. Mutual funds get a colour code

Expense Account, Mint

Sixteen years ago, when I switched jobs from the leader in daily business news to join a start-up magazine that aimed to help average middle-class people manage their money, there was more than one comment on the foolhardiness of doing this. Business journalism was corporate-facing and personal finance as a genre did not exist. We had tip sheets that further confirmed the belief that the stock market was a casino. Home loans, credit cards, mutual funds (MFs), life and medical insurance products either did not exist for the average Mr Gupta or was very basic in the offering. But the magazine hit the stands around the time that these products were just about coming to the market and the consumers were keen to understand them better. The genre has been a success, but over the years my struggle has been not just with getting reporters to “get” personal finance reporting but also with regulators and policy makers who did not think that the final retail customer deserved much attention. Regulators were more concerned with systemic risk and the risk of failure of banks and financial sector companies, making them work somewhat like industry associations rather than regulators. The corporate-first attitude shows up in the nomenclature of policy and regulations. Insurance and mutual funds are all about “penetration”. The pecking order for the industry is decided by assets under management and not the financial well-being of consumers of financial products. Life insurance is measured by number of policies and premium income and not the sum assured per policy.

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Should banks sell insurance at all?

Expense Account, Mint

Because much of policymaking in India is about lobbying power, we see some strange outcomes. Take the draft bancassurance guidelines, for example, that lay down the rules of bank tie-ups for insurance companies. The weird spectrum-like allocation of banks to insurance companies is a classic example of a compromise that benefits no one and will actually harm the market. Recent events in the bancassurance space that point to some companies tripping over regulatory boundaries corroborate this. The evolution of the November 2011 bancassurance draft guidelines (you can read them here) is the story of a face-off between two evenly matched lobbies. On one side is the insurance industry, with its flagship government-owned default sovereign wealth fund, the Life Insurance Corp. of India (LIC). And on the other is the banking sector whose lobbying power kept our money earning nothing because of a rigged formula to calculate interest rates on savings deposits that were fixed at 3.5% for years. The story of how the draft bancassurance guidelines came to be have enough masala to run a full Bollywood trilogy. But as of now, the banks are ahead.

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What to expect when investing in MFs

Expense Account, Mint

What do you expect your mutual fund to do? It is worth asking and answering this question as we carry out Mint Money’s biannual exercise of examining Mint50—the portfolio of investment-worthy funds that the Mint Money team curates. A quick word on why we do this. Indian households have a high savings rate but most of this lies in inflation-unfriendly deposits and traditional insurance plans. A gradual move up the risk scale would benefit the investors but that has not happened and fewer than 15% of Indians expose their money to equity, either directly or through funds. Similar looking products promising to do the same thing—long-term corpus building that come from three different regulators—seem to be confusing investors.

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Do own-brand products leave you worse off?

Expense Account, Mint

In the market for a TV, I checked out all the vendors nearby. In the Sony and Samsung showrooms I got the Sony and Samsung TVs. In Croma, I got a variety of brands. On one TV it said Croma. That was the in-house brand which was cheaper than the other branded TVs. I find the same practice when I go to Shoppers Stop or Big Bazaar—own-brand retail is usually cheaper and is labelled clearly on the package. I know that it is cheaper because a quick check on the price tag tells me that. I can look at the picture quality, the specs of the TV or the style and cut of the clothes to compare with the other brands in the store. Can we say the same about buying financial products? Do consumers of financial products fully understand the impact of buying an own-brand product or do they allow themselves to be “advised” by their seller towards the product they end up buying?

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