Cobrapost fallout: RBI extends investigation to 34 banks - Business Standard
Main reason perverse incentives; to ban staff's product sale targets
Online portal Cobrapost’s sting operations, which alleged three private sector banks were violating know your customer (KYC) and anti money-laundering norms, are turning out to be a tip of the proverbial iceberg.
The Reserve Bank of India (RBI), which is investigating the allegations, has found the root cause is the perverse incentive schemes that banks offer to employees, which lure them to sell insurance and mutual fund products.
As a result, the probe, which started with three banks, has now been extended to 34 major banks in India which sell such products. “It is not that only three banks indulge in such practice. It is likely that such practice is prevalent in other banks, too,” said a source.
RBI was always wary about such distribution tie-ups, as an arm’s length principle was not always maintained by banks and their partners.
The investigations also revealed that insurance and mutual fund agents were found sitting in bank branches to sell such products, giving the wrong impression to customers that the agents are the bank’s staff. This also exposes banks to reputational risk.
The commission income from selling insurance and mutual fund products by banks has also increased in the recent period, the central bank has noted.
It also observed that the insurance or mutual fund house decides the targets for bank employees and pay them the incentives directly.
RBI has questioned the banks on this practice. Sources indicate incentives will be streamlined in which the insurance/mutual fund firm will pay the fee to the bank, which will later pass it to the employees.
“RBI has questioned how non-sales staffs, involved on operational matters like a person who is in the teller counter, can have a target. Lure of achieving target leads to not doing the basic duty,” said a senior banker.
RBI is likely to issue norms banning sales incentives to operational staff of the banks. Similarly, target on selling gold coins by operational staff will also be abolished.
However, violation of anti money-laundering norms has not been found. “Money laundering has a criminal connotation. It was not found in the initial investigation that bank employees are indulging in such activities,” said banking industry sources.
India’s three largest private banks, ICICI, HDFC and Axis, were named by Cobrapost last month for allegedly indulging in money-laundering and violating KYC norms.
The portal’s sting operation alleged some bank officials had offered to launder unaccounted money by investing in insurance schemes. These three banks have also commissioned forensic audit and have suspended the staff allegedly involved in violating the norms. Banks in India account for a significant share in the distribution of products in the life insurance segment.
While RBI acknowledged banks selling insurance product offer several benefits such as building better relationship with customers and helping insurers to reach to a vast majority of the population through branch network, it said there were many instances of mis-selling of insurance products through this channel.
UNDER SCANNER
* Reserve Bank of India lens on mutual fund (MF), insurance, gold coin sale by branch’s non-sales staff
* Commission income from selling insurance and MF banks increased
* Incentive process to be streamlined
* Mis-selling leading to exposure banks to reputational risk
* Money laundering evidence as alleged by Cobrapost not found
The Reserve Bank of India (RBI), which is investigating the allegations, has found the root cause is the perverse incentive schemes that banks offer to employees, which lure them to sell insurance and mutual fund products.
As a result, the probe, which started with three banks, has now been extended to 34 major banks in India which sell such products. “It is not that only three banks indulge in such practice. It is likely that such practice is prevalent in other banks, too,” said a source.
RBI was always wary about such distribution tie-ups, as an arm’s length principle was not always maintained by banks and their partners.
The investigations also revealed that insurance and mutual fund agents were found sitting in bank branches to sell such products, giving the wrong impression to customers that the agents are the bank’s staff. This also exposes banks to reputational risk.
The commission income from selling insurance and mutual fund products by banks has also increased in the recent period, the central bank has noted.
It also observed that the insurance or mutual fund house decides the targets for bank employees and pay them the incentives directly.
RBI has questioned the banks on this practice. Sources indicate incentives will be streamlined in which the insurance/mutual fund firm will pay the fee to the bank, which will later pass it to the employees.
“RBI has questioned how non-sales staffs, involved on operational matters like a person who is in the teller counter, can have a target. Lure of achieving target leads to not doing the basic duty,” said a senior banker.
RBI is likely to issue norms banning sales incentives to operational staff of the banks. Similarly, target on selling gold coins by operational staff will also be abolished.
However, violation of anti money-laundering norms has not been found. “Money laundering has a criminal connotation. It was not found in the initial investigation that bank employees are indulging in such activities,” said banking industry sources.
India’s three largest private banks, ICICI, HDFC and Axis, were named by Cobrapost last month for allegedly indulging in money-laundering and violating KYC norms.
The portal’s sting operation alleged some bank officials had offered to launder unaccounted money by investing in insurance schemes. These three banks have also commissioned forensic audit and have suspended the staff allegedly involved in violating the norms. Banks in India account for a significant share in the distribution of products in the life insurance segment.
While RBI acknowledged banks selling insurance product offer several benefits such as building better relationship with customers and helping insurers to reach to a vast majority of the population through branch network, it said there were many instances of mis-selling of insurance products through this channel.
UNDER SCANNER
* Reserve Bank of India lens on mutual fund (MF), insurance, gold coin sale by branch’s non-sales staff
* Commission income from selling insurance and MF banks increased
* Incentive process to be streamlined
* Mis-selling leading to exposure banks to reputational risk
* Money laundering evidence as alleged by Cobrapost not found
Action will be taken against the three private banks: FinMin---Business Standard
Last month, Cobrapost sting had exposed employees of these banks offering to convert clients' black money into white
The finance ministry on Thursday assured action against the three private banks which were alleged by online portal Cobrapost for violating know your customer and anti-money laundering norms. Following the allegations, the Reserve Bank of India (RBI) investigated the issue and shared the report with the finance ministry.
Rajiv Takru, financial services secretary, who met RBI officials on Thursday, said, “The report has come and you’d see some action.” “Whatever responsibilities would have to be fixed will be fixed and whatever rectifications have to be done would be done,” he added.
He, however, said no timeline had been fixed for taking action. Takru told reporters, “There is no tearing hurry to run into some kind of hasty decision-making and in the process do something foolish.” He said, “Banks would be asked for their version based on the audit reports and then we would decide what needs to be done.”
Several banking regulation issues were discussed. Last month, Cobrapost, in a sting operation, had shown employees of three private banks — ICICI, HDFC and Axis offering to convert clients’ black money into white. Following the exposé, all three banks, as well as RBI and the Insurance Regulatory and Development Authority (Irda) had constituted enquiry committees into the matter. RBI’s committee has already given its report. The central bank is yet to make it public. Irda had instituted an inquiry as an offer was allegedly made to convert black money into white through insurance policies, amongst others. The Irda panel is yet to give the report.
Takru, however, said there was no risk of systemic failure. He said, “There are certain aberrations which have been discovered.” He said, “These will be addressed, both in systemic factors and individual cases.” He added, “All concerned will be given a complete opportunity to explain and what is correct and appropriate would be done.”
CAG audit
Rajiv Takru, financial services secretary, who met RBI officials on Thursday, said, “The report has come and you’d see some action.” “Whatever responsibilities would have to be fixed will be fixed and whatever rectifications have to be done would be done,” he added.
He, however, said no timeline had been fixed for taking action. Takru told reporters, “There is no tearing hurry to run into some kind of hasty decision-making and in the process do something foolish.” He said, “Banks would be asked for their version based on the audit reports and then we would decide what needs to be done.”
Several banking regulation issues were discussed. Last month, Cobrapost, in a sting operation, had shown employees of three private banks — ICICI, HDFC and Axis offering to convert clients’ black money into white. Following the exposé, all three banks, as well as RBI and the Insurance Regulatory and Development Authority (Irda) had constituted enquiry committees into the matter. RBI’s committee has already given its report. The central bank is yet to make it public. Irda had instituted an inquiry as an offer was allegedly made to convert black money into white through insurance policies, amongst others. The Irda panel is yet to give the report.
Takru, however, said there was no risk of systemic failure. He said, “There are certain aberrations which have been discovered.” He said, “These will be addressed, both in systemic factors and individual cases.” He added, “All concerned will be given a complete opportunity to explain and what is correct and appropriate would be done.”
CAG audit
The Comptroller and Auditor General (CAG) had recently pointed to loopholes by banks in the agriculture debt waiver scheme announced by the government in 2008. Based on that, the finance ministry and CAG had asked banks to take corrective actions.
Commenting on it, Takru said the matter was being addressed by banks and the finance ministry was receiving information every month. He said “Recoveries have started and in a month or two, the matter will be resolved.”
NPA and restructuring
With most pubic sector banks seeing a rise in non-performing assets, the finance ministry has asked the lenders to initiate action so that asset quality can be improved. Banks have requested the central bank not to implement the higher provisioning requirement on standard restructured advances with immediate effect. He said, “We have told banks they must reduce their gross non performing assets in the environment that exists. I do not want to confuse and dilute the whole thing by saying RBI should change the norms and so the banks have been told to pull up their socks within the existing framework and that is what these are required to do.”
Action will be taken against the three private banks: FinMin
Last month, Cobrapost sting had exposed employees of these banks offering to convert clients' black money into white
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