In this blogpost, Renuka Sane, Visiting Fellow at IDFC Institute, along with Monika Halan writes on the mis-selling of financial products by banks, emphasising the lack of consumer protection in financial regulation in India. To understand the situation better, Sane and Halan conducted an audit study on the sale of financial products accross 400 bank branches in Delhi, India. Excerpts below:
"In a financial product, a critical aspect of the sale is the disclosure made at the time of sale since the product is invisible and the moment of truth of the product can be far into the future. Regulators might require sales staff to disclose product features, but have little control over whether they are actually disclosed, and importantly, disclosed truthfully. There is weak evidence about whether agents intentionally or otherwise make mistakes in the disclosures. This can have large consequences, especially in environments such as India, where financial literacy is low, and regulatory enforcement is weak..."
"We find that in private sector banks, where staff have high sales incentives, the high commission product is recommended. In public sector banks, where there are deposit mobilisation targets, fixed deposits are recommended. We also find that the more complex features of a product, such as costs and optimal holding period, are very rarely voluntarily disclosed. When specifically requested, information provided is inaccurate or incomplete..."
"Our results point to the difficulties in the use of disclosures for achieving better consumer outcomes. Even if disclosures are made mandatory on product brochures, it is unlikely that they get conveyed to the customer in the correct manner. Regulators have taken the view that since the customer has signed on the documents, the customer is responsible for the purchase. The problem is made worse due to the lack of fixing responsibility on the sales channel for mis-sold products. Unless there is a mechanism of enforcement, a disclosure policy is unlikely to help achieve better outcomes..."
Read the full article here.
Read Sane and Halan's original paper on which the research is based here.