Why Mis-selling By Banks ‘May’ Have Gone Up Post-Covid

The basic idea for almost everything I write emanates from some data point that tells me something. But this piece is slightly different and comes from the experiences of people around me and what I have been seeing on the social media.

I think with this limited anecdotal evidence and some data that I shall share later in the piece, it might be safe to say that mis-selling by banks post-covid may have gone up. Mis-selling can be defined as a situation where an individual goes to a bank wanting to do one thing, and ends up doing something else, thanks to the relationship/wealth manager’s advice.

The simplest and the most common example of this phenomenon is an individual going to a bank with the intention of putting his money in a fixed deposit and ends up buying some sort of an insurance policy or a pension plan.

Let me offer some evidence in favour of why I think the tendency to mis-sell post covid may have gone up.

1) Between March 27, around the time when the seriousness of the covid pandemic was first recognized in India, and October 9, the latest data available, the deposits of Indian banks have gone up by Rs 7.36 lakh crore or 5.4%.

Clearly, there has been a huge jump in bank deposits this year. To give a sense of proportion, the deposits between October 2016 and December 2016, when demonetisation happened, went up by Rs 6.37 lakh crore or 6.4%.

The increase in deposits post covid has been similar to the increase post demonetisation. Of course, the post-covid time frame has been longer.

What does this tell us? It tells us that people haven’t been spending. This is due to multiple reasons.

The spread of covid has prevented people from stepping out and there is only so much money that can be spent sitting at home (even with all the ecommerce). This has led to an accumulation of deposits. Further, people have lost jobs and seen their incomes crash. This has prevented spending or led to a cutdown. And most importantly, many people have seen their friends and family lose jobs. This has automatically led them to curtail their spending. All this has led to an increase in bank deposits.

2) Why do banks raise deposits? They raise deposits in order to be able to give them out as loans. Between March 27 and October 9, the total non-food credit given by banks contracted by Rs 38,552 crore or 0.4%. Banks give loans to the Food Corporation of India and other state procurement agencies to help them primarily buy rice and wheat directly from farmers. Once this lending is subtracted from the overall lending of banks what remains is the non-food credit.

What does this contraction in lending mean? It means that people and firms have been repaying their loans and not taking on fresh loans. On the whole, between March end and early October, banks haven’t given a single rupee of a new loan. This explains why interest rates on deposits have come down dramatically. Interest rates have also come down because of the Reserve Bank of India printing and pumping money into the financial system to drive down interest rates.

3) Using these data points, we can come to the conclusion that banks currently have an incentive to mis-sell more than in the past. Why? Banks currently have enough deposits. They don’t need more deposits, simply because on the whole, people and firms are not in the mood to borrow.

All this money that is not lent ends up getting invested primarily in government securities, where the returns aren’t very high. As of October 9, around 31.2% of total deposits were invested in government securities. This is the highest since July 2018.

The trouble is that banks cannot stop taking deposits even though they are unable to currently lend them. They can only disincentivise people through lower interest rates.

Or they can set the targets of relationship managers/wealth managers in a way where they need to channelise savings into products other than fixed deposits.

While banks have to pay an interest on fixed deposits, irrespective of whether they are able to lend them or not, they earn a commission on the sale of products like unit linked insurance plans, pension plans, mutual funds, portfolio management services, etc. This commission directly adds to the other income of the banks.

Basically, the way this incentive plays out explains why mis-seling by banks may have gone up post covid. Also, the risk of repaying a fixed deposit lies with the bank. The same is not true about the other products where the bank is just a seller and the risk is passed on.

What to do?

So, what should individuals do in a situation like this, is a question well worth asking? Let’s say you go to a bank to invest your money in a fixed deposit. As explained above, the bank really does not want your money in fixed deposit form.

The wealth managers/relationship managers will resort to the contrast effect while trying to persuade you to not put your money in fixed deposits. The interest rates on fixed deposits are very low currently. An average fixed deposit pays an interest of 5-5.5%. Clearly, once we take inflation and taxes on the interest on these deposits into account, the returns are in negative territory.

The relationship/wealth manager will contrast these low/negative returns with the possible returns from other products. His or her pitch will be that the returns will be higher in other cases. In the pitch, he or she will tell you that the returns from the other products are as good as guaranteed. A tax saving angle might also be sneaked in (for insurance products). (Of course, he or she will not present this in such a dull way. Typically, relationship/wealth managers tend to be MBAs, who can phaff at the speed of thought and leave you totally impressed despite their lack of understanding of things).

What’s the trouble with this? The returns in these other products are not fixed. In case of a fixed deposit the interest rate is fixed (which is why the word fixed is used in the first place). Now you might end up with a higher return on other products, but there is no guarantee to that. Also, sometimes the aim of investment is different. If you are putting your money in a fixed deposit, the aim might simply be return of capital than return on capital.

Further, the investment in these other products might be locked in for a long period of time, while you can break a fixed deposit at any point of time (of course you end up with lower returns). This is especially true for a tax saving investment.

To conclude, the next time you go to a bank, stick to what you want to do with your money and don’t fall prey to what the wealth/relationship manager wants you to do. Clearly, his and your incentives are not aligned. Also, if you can use internet banking to manage your money, that is do fixed deposits online, that’s the best way to go about it.

10 things the Cobrapost sting tells us

king cobra

Vivek Kaul

Stings in India till now have been carried out to expose politicians. The Cobrapost sting is the first sting that has brought into the public domain the murky way in which the big Indian private banks operate. But more than just exposing the murky way in which big banks operate, the sting brings out in the open other uncomfortable truths as well.

1. The finance minister P Chidambaram in his recent budget speech had said “There are 42,800 persons – let me repeat, only 42,800 persons – who admitted to a taxable income exceeding Rs 1 crore per year.” Of course no one took that number seriously. We now know why.
The Cobrapost sting clearly shows us that there are many more people with a taxable income of more than Rs 1 crore. The straightforward and more than helpful way in which the banks were ready to help invest the black money of the ‘supposed’ politician that the Cobrapost reporter was fronting for, can only tell us one thing: Banks seem to be doing this regularly.
And given this we can only conclude that there are many people out there with taxable incomes of more than Rs 1 crore, who don’t pay tax, than just 42,800. While it’s an obvious conclusion that did not need this visual evidence, but it is still an important conclusion nonetheless.
2. The second thing that the sting tells us is that those who have black money do not keep all of it under their mattresses. A lot of it as we know goes into buying real estate (largely benami). But the holders of black money seem to like to diversify their hoarded “wealth”. As the Cobrapost press release points out “(Banks) accept huge amounts of cash and invest it in insurance products and gold.” The money invested in insurance products is in turn invested in stocks, government securities and financial securities issued by corporations. So hoarders of black money do seem to be following the age old investing principle of “don’t put all your eggs in one basket”. They seem to be buying everything. From gold. To real estate. To stocks. And even have money in fixed deposits with banks.
3. By investing at least in gold and fixed deposits, hoarders of black money also show us that they like to have some liquidity in the assets that they own. Real estate is not terribly liquid and neither are insurance policies.
4. The sting also shows our love for gold which goes with the large amount of black money in this country. Very small amounts of gold can be used to store a large amount of black money as wealth. India has lot of gold because Indians love it is the normal claim that is made, but India also has a lot of gold because there is a lot of black money floating around.
5. The good bit is that instead of just lying around under the mattresses of people, some of the black money is coming into the financial system. When people buy insurance policies which in turn buy either debt securities issued by the government or the private sector or invest in shares issued by a company getting listed on the stock exchange, they are in some way financing someone who needs the money. That is the ultimate job of any financial system. To move money from those who have it, to those who need it. Now what proportion of the total black money comes into the financial system, that no one has any clue off. But its better than people just channelising all their black money into land and other forms of real estate. Also as more of this money comes into the financial system the greater are its chances of being detected.
6. The other interesting thing is that banks are helping channelise black money into insurance and not mutual funds. The main reason for this is the fact that insurance companies pay a much higher commission than mutual funds do, even though mutual funds remain a much superior mode of investing. It also goes with the cross selling that banks tend to do these days given that almost all of them own insurance companies. So if you have ever wondered why the moment you enter a bank they try to sell you all kind of insurance policies and not attend to the need you really went there for, you now know the answer.
7. Another major reason for banks selling insurance and not mutual funds to this set of clientèle who wants to put its black money to work is the fact that the know your customer (KYC) norms for mutual funds are much stronger than those required to invest in insurance. This is clearly an anomaly that needs to be done away with. Either mutual fund KYC norms need to be weakened or insurance KYC norms need to be strengthened. If it was not for these KYC norms, mutual funds remain a better way of hoarding black money given that they are very liquid. You can buy a mutual fund today and sell out tomorrow (unless you are buying a tax saving mutual fund that comes with a lock-in of three years). The same is not possible in case of insurance which comes in with a minimum lock-in of five years. Hence, mutual funds also need to be provided equal access to black money as insurance has. Also someone who has a lot of black money and is wealthy, doesn’t really need to pay for the “pure” insurance that compulsorily comes with the investment oriented insurance plans.
8. The sting also tells us that banks have double standards. If you are ready to deposit/invest a lot of money with/through them, then they are more than ready to lay out the red carpet for you. If you are not, then try changing your address once and wait for all the proofs they want. Or try asking for a locker, and wait for the bank clerk/relationship manager to tell you that you will also have to open a fixed deposit of a few lakhs to get a locker. Meanwhile as the Cobrapost press release points banks “ allot lockers for the safekeeping of the illegitimate cash, including special large size lockers to accommodate crores of hard cash.” Or try depositing money and the bank clerk will give you a nasty look for having to count the total amount of money you are depositing. Whereas if you have black money, the bank will come to your residence to collect it. As the Cobrapost press release points out the bank will “personally come to the residence of the client to take the black money deal forward and collect the cash, even bring along counting machine.” Wow.
9. What the sting also tells us is that how simple it is to create a fake identity in this country. The rapist Bitti Mohanty could do it. So can you if you have black money. And the banks will help you with it. As the Cobrapost press release points out “ICICI Bank officials were ready to make a suitable profile for the client, such as showing him as an agriculturist or engaged in some business, so as to make the investment unquestionable. On the other hand, Axis Bank officials proved to be a notch above in inventing fraudulent means. Use “sundry” accounts of the bank, they suggested, to deposit all the illegal cash from where it is to be routed into investment. Either use accounts of other customers, for a fee, to transfer money abroad, or use some shell company and take away a chunk of foreign currency as expenses toward business-cum-leisure trips.”
10. And to conclude, what the sting clearly tells us is that everybody who pays Income Tax in this country is basically an idiot who is being taken for a royal ride. If you have a lot of black money and you are not paying tax on it, chances are somebody out there is waiting for you with a red carpet.
Please go find him.

The < a href="http://www.firstpost.com/business/10-things-that-the-cobrapost-sting-tells-us-about-banks-661376.html">article originally appeared on www.firstpost.com on March 14, 2013 

(Vivek Kaul is a writer. He tweets @kaul_vivek) 


Fear is the key: What Sushma, Rajiv and i-pill have in common


Vivek Kaul

It’s around midnight as I write this and I am just back from a late dinner with a friend. Before we started to have dinner my friend insisted that I use a hand sanitiser. While I have nothing against people pretending to be clean all the time, but the smell of a hand sanitiser really puts me off and can even make me sneeze.
Given that I refused to use it.
“How can you not use a hand sanitiser before eating?” she asked.
“Well I have washed my hands,” I replied.
“But that’s not enough,” she insisted.
“Why not?” I asked.
“Because a hand sanitiser kills all the germs.”
“What germs?” I asked, ripping into the tandoori chicken.
“Ah. End of conversation. Guess cleanliness isn’t really your thing!” she exclaimed at my ingratitude.
The idea of using hand sanitisers has caught on(especially with women) after the recent global swine flue scare. But does it really help? As brand management expert Martin Lindstrom writes in his latest book Brandwashed – Tricks Companies Use to Manipulate Our Minds and Persuade Us to Buy “Neither swine flu nor SARS can be prevented by the use of antibacterial cleansing gels. Both viruses are spread via tiny droplets in the air that are sneezed or coughed by people who are already infected. ”
In fact as Lindstrom told me in an interview “What’s ironic is that none of those products…actually do any better job than soap and water.”
That being the case why are women so in love with hand sanitisers? As Lindstrom puts it in Brandwashed “The idea of an unseen, potentially fatal contagion has driven us into nothing short of an antibacterial mania.”
And companies making hand sanitisers have simply captured this mania as a profitable money making proposition. As Lindstrom told me “The companies have done a extraordinary job in building their brands on the back of the fear created by those global viruses – indicating that we’ll be safe using these brands…The ironic side of the story however is that the life expectancy in Japan is decreasing for the first time in history – why – because the country simply has become too clean – the Japanese have weakened their immune system as a result of overuse of hand sanitising products.”
What this little story tells us is that fear of something happening (or not happening for that matter) is a great selling strategy and you can’t argue with a woman who has made up her mind.
As Lindstrom put it “we’re all hardwired to be seduced by fear – fear is the number one soft button in our brain – it is a survival instinct. Fear is used by most insurance companies and even Colgate who claimed in one ad that they could remove the risk of cancer by the usage of their toothpaste,” said Lindstrom.
The fact that fear is a great selling strategy makes companies build it directly into their advertisements. The advertisement of i-pill, an emergency contraceptive pill, shows a mother telling her daughter “Kyun risk le rahi hai?” when the daughter calls and hints that she has had unprotected sex.
Or take the case of Saffola oil which has run a highly successful campaign over the years on the fear of a heart attack. It used to run an advertisement for years showing a man being wheeled into the operation theatre, with the sound of the ambulance siren in the background (Let me concede I also use Saffola oil for cooking).Fair and Lovely, which claims to be a skin lightening cream, has run on a plank of the fear of rejection for a “dark” girl. This despite protests from several quarters. The advertisement of the health drink Complan is built around the fear that those not having Complan will not grow as tall as those having it.
Almost every insurance company uses fear as a selling strategy. This can vary from the fear of death, to the fear of not having enough money to meet hospital bills, to the fear of not having enough money for the son’s or the daughter’s education or not having enough money for the daughter’s wedding and so on.

As Tyler Cowen, an economist at George Mason university in the US, writes in the book, Discover your Inner Economist “Often , buying insurance is about investing in a story about who we are and what we care about; insurance salesmen have long recognised this fact and built their pitches around it.”
Having given these examples, let me concede that some of these advertisements do push consumers towards buying the right product. But most of these advertisements are misleading. As the Business Standard recently reported “Whether it’s Complan or Horlicks, they claim to make a child taller and smarter. But their promises are not based on any scientific data….Abu Hasem Khan Choudhury, minister of state for health and family welfare informed the Lok Sabha in a written reply on November 30 that the food regulator had begun prosecution proceedings against manufacturers of 19 leading brands and issued show cause notices to 19 others for making false claims regarding the nutritional value of the product in advertising and on the label.”
As the story further pointed out “ For instance, Complan, a leading drink brand, claims it makes children grow twice faster. Horlicks promises to make children “taller, stronger and sharper”. Kellogg’s Special K claims people who eat low fat food in their breakfast tend to be thinner than those who do not, without providing any scientific study to back this claim. Products like Saffola oil, Rajdhani Besan and Britannia Vita Marie biscuits have been booked for making false claims of being “heart-friendly” and “reducing cholesterol”.”
All these products play on the fears and insecurities of consumers. If my kid doesn’t drink Complan/Horlicks he won’t grow tall. If I don’t eat Kellog’s Special K I will become fat. And if I don’t have Saffola oil I will have a heart attack.
Lindstrom summarises this phenomenon very well in a paragraph in his book Buyology – How Everything We Believe About Why We Buy is Wrong “That if we don’t buy their product, we”ll somehow be missing out. That we’ll become more and more imperfect; that we’ll have dandruff or bad skin or dull hair or be overweight or have a lousy fashion sense. That if we don’t use this shaving cream, women will walk by us without a glance…That if we don’t wear this brand of lingerie no man will ever marry us.”
Politicians are looking to do exactly the same thing when they practise the politics of fear. The recent debate on FDI in big retail had Sushma Swaraj saying things like “Will Wal-Mart care about the poor farmer’s sister’s wedding? Will Wal-Mart send his children to school? Will Wal-Mart notice his tears and hunger?”
She also said that “The remaining 70 percent of the goods sold in these supermarkets will be procured from China. Factories will open in China, traders will prosper in China while darkness will befall 12 crore people in India.” This is scaremongering of a kind similar to that indulged in by companies to sell their products.
Arun Jaitley, the leader of opposition in the Rajya Sabha, also indulged in the same when he said that “India will become a nation of sales boys and girls.”
And before I am labelled to be a Congi by the internet Hindus let me clarify that politicians from across the political spectrum have practised this strategy at various points of time.
“When a big tree falls, the ground shakes,” said Rajiv Gandh after his mother Indira Gandhi was assassinated by her Sikh bodyguards.
A section of the Indian National Congress (back then known as the Congress-I) whipped up mass frenzy against the Sikhs after the assassination. In the pogrom that followed Sikhs were killed all across northern and eastern India. And the Congress Party got 415 seats out of the 540 seats in the Lok Sabha, a feat not achieved even by Jawaharlal Nehru, the biggest leader that the party has ever had.
Kanshi Ram, had formed the the Dalit Soshit Samaj Sangharsh Samiti or DS4, before forming the BSP. The rallying cry for DS4 was”Thakur, Brahmin, Bania Chhod, Baki Sab Hain DS4.” This worked so well that when Ram decided to form the BSP he came up with a similar sounding but a more subtle slogan. “Tilak Tarazu aur Talwaar, inko maaro joote chaar.
The late Bal Thackeray was a master of this craft first putting fear of Tamils in the minds of the Marathi Manoos and then Muslims as times changed. His nephew Raj, who left to form his own party the Maharashtra Navnirman Sena, took this strategy further and has put the fear of Bhaiyyas and Biharis in the minds of the Marathi Manoos.
Varun Gandhi made front page headlines when in a speech he said “Ye panja nahi hai, ye kamal ka haath hai. Ye kat** ke galey ko kaat dega chunaav ke baad.” Then there are also examples of parties like DMK, which have been built on creating the fear of the loss of culture and language.
When politicians try to create fear in the minds of the citizens their aim is similar to that of companies trying to create fear in the minds of consumers. Fear “is what our brains remember…”writes Martin Lindstrom in his book Buyology. Fear creates what Lindstrom calls “somatic markers” or brain shortcuts that link the brand sold to what needs to be done to take care of the fear: “Want you kid to grow tall? Get him to drink Complan!”
“Want a healthy life without a heart attack? Eat Saffola oil.”
Or in a political context “Don’t want the Chinese take away Indian jobs or sell goods in India? Vote for the Bhartiya Janata Party.”
“Want freedom from the oppression of upper castes? Vote for the Bahujan Samaj Party.”
“Want to revenge the assassination of Indira Gandhi? Kill Sikhs but don’t forget to vote for the Congress.”
While it is not as simple as that, but that is what it essentially means. Fear also gives rise to anxieties and insecurities of people and helps politicians come up with a war cry and make themselves easily heard. As Bill Bonner and Lila Rajiva write in Mobs, Messiahs and Markets “Men are ready to die for the group and kill anyone who resists its will.”
The war cry before the Babrji Masjid was destroyed was “Ek dhakka aur do, Babri Masjid tod do!”.
As Lindstrom writes in Brandwashed in the context of marketers “So whether it’s germs or disease or some feared version of a future self, marketers are amazingly adept at identifying a fear out of the zeitgeist (a German word which means the spirit of the times, italics are mine), activating it, amplifying it and preying on it in it in ways that hit us at the deepest subconscious level.”
Politicians do the same thing. They identify the prevailing fear, like Wal-Mart will get in all low cost Chinese goods (as if Indian companies are not) and destroy the kiranawallas. And then they activate it and amplify it by talking about it in their speeches. And if the comments on this piece that I wrote a couple of days back are anything to go by, they have been successful at it.
And so was Rajiv Gandhi!

The article originally appeared on www.firstpost.com on December 7, 2012.

(Vivek Kaul is a writer. He can be reached at [email protected])