Remove the ‘*’ in banking products – The Hindu BusinessLine*

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Bundling and force-selling of insurance plans with banking products is unacceptable

Mis-selling: The devil lies in the detail | Photo Credit: Atstock Productions

The problem of mis-selling financial products by forcefully bundling it with another product is a two-decade-old problem in India. It started with mutual funds, spread to insurance products and now banks have also jumped on the bandwagon.

Recently, the Finance Ministry pulled up public sector banks (PSBs) for mis-selling. They are a late entrant to the practice of bundling life insurance products with loan products, but the Ministry has urged them not to do so, as it could affect the core business of banks.

For private banks, incentives to employees are often benchmarked against the ‘fee-generating’ products they sell. This could be an insurance policy, mutual fund, broking account or simply even opening bank accounts of high net worth individuals.

The practices of private banks are increasingly being emulated by PSBs for earning higher fee income and this probably explains why they jumped the cross-selling bandwagon.

But at what point does cross-selling become mis-selling? If the customer is given an opportunity to assess his/her needs to buy a financial product and choose between different products based on its pricing, then it is ethical cross-selling.

But what happens more often than not is that an insurance policy is thrust into the borrower’s hand, along with the loan document, only in the final stages of closing the loan documentation.

If the borrower doesn’t sign up for the policy, banks withhold the loan at the agreed upon rate. They jack up the interest rate if the customer dissents.

Bundling of products

The highly prevalent practice is bundling life insurance policies with home loans. There are advantages to such as policy, as it ring-fences the liabilities of the borrower’s family towards the home loan, in case of the borrower’s death.

But these plans come at a steep cost and the one-time premium must either be paid upfront or gets added to the loan amount.

Now, if the borrower refuses, the rate of interest, which already factors the borrower-specific risks, is increased. That’s the penalty for refusing an insurance plan. And in this process, are PSBs aiding the premium growth of PSBs-led insurance companies? Not quite.

PSBs are critical bancassurance partners for private life insurers, and they often sell more policies of private insurers, rather than their own subsidiaries.

Ultimately, they are enriching the private players. Life insurance bundled with a home loan is not a bad idea. But the borrower should be allowed to choose the product democratically. Perhaps be allowed to opt for the insurer with whom (s)he has already availed a policy.

If the borrower doesn’t want to take the insurance plan, penalising him/her by jacking up interest rate is unacceptable. Like the Finance Minister mentioned, it can be detrimental to the core business, because the product risk hasn’t been priced effectively.

But the Minister’s messaging should not be restricted to just the PSBs, it must be taken seriously by the entire banking fraternity.

With retail loans accounting for over 60 per cent of the total loans, irrational bundling of products can have a cascading impact across the financial sector if the tide turns choppy.

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