The Curious Case Of SBI's Incentives-For-Insurance Sales
Instances of incentives for third party product sales at SBI are on the rise, leading to more mis-selling
A State Bank of India employee gets a silver coin and an all-expenses-paid trip for a certain number of insurance policies sold. It is not relevant if the customer needs the plan, though, according to at least six SBI officials.
The Reserve Bank of India and the Finance Ministry have repeatedly tightened the noose on mis-selling of third-party products and the incentives doled out for recognition.
SBI has a bancassurance pact with SBI Life Insurance Co., and SBI General Insurance Co. For the sale of mutual funds, the bank is in a joint venture with SBI Mutual Fund Trustee Co.
While the rewards for the sale of third-party products are a clear violation of the Reserve Bank of India’s guidelines dated July 2015, the lack of any significant punishment or penalty for such malpractices hampers customer service and protection.
The RBI prohibits incentives of any kind, cash or non-cash, to the bank staff engaged in insurance broking services by the insurance company.
“There should be no violation either of Section 10(1)(ii) of the BR Act, 1949 or the guidelines issued by IRDA in payment of commissions/brokerage/incentives. This may be factored in while formulating a suitable performance assessment and incentive structure for staff,” the RBI ‘s guidelines say.
The Banking Regulation Act, 1949, states that no banking company should employ any person whose remuneration or a part of it takes the form of commission or of a share in the profits of the company.
So, what is driving the deed in disguise?
Fierce competition in the insurance industry is one of the major reasons for banks to resort to mis-selling. For the bank employees, it is the fear of being transferred or demoted, people with knowledge of the matter said. All spoke on the condition of anonymity.
Perks Of The Project
To keep a branch active, the bank has set monthly targets for third-party product sales depending on the size of the geography and manpower available, the fourth of the six officials quoted above told BQ Prime.
For instance, if an employee has sourced a premium of Rs 1 lakh annually, he is eligible for a 5-gramme silver coin, screenshots of WhatsApp messages seen by BQ Prime showed.
For two insurance policies, the employee gets two silver coins, and so on until five policies are sold. For every additional policy sold after five, the employee would be rewarded with an additional silver coin of 5 grammes.
Further, staff in managerial positions are offered trips entirely funded by the insurance company, the second of the six officials quoted above said. Until a few years ago, senior management officials above Scale VII were rewarded for foreign trips depending on successful third-party sales at branches under them, this person added.
Trips within the country are offered under the garb of educational tours and felicitation ceremonies to outstation locations, the people quoted above said. The senior management convenes a review meeting every month to take stock of the progress on the sale of third-party products, they said.
One of SBI’s internal circulars dated Sept. 21, 2019 stated that all reward and recognition incentives related to activities in respect of cross-selling of third-party non-banking products will be barred. BQ Prime has reviewed a copy of this circular.
This comes after the RBI has highlighted the risks of misselling non-core banking products several times in the past.
"Misselling raises serious consumer protection issues. Further, as observed from the recent allegations, wealth management activities as well as marketing third-party products can expose banks to serious reputational risks,” the RBI said in a 2013 circular.
However, the regulator has not levied any stringent rules on banks engaged in insurance services, except bringing in para-banking activities under the purview of the banking ombudsman.
In a scenario where people are required to do things beyond normal work, selling third-party products requires special efforts, and they go out of the way. The nature of the product will induce misselling, a former SBI official said, speaking anonymously.
An aggressive battle among insurance companies to grab maximum market share is also inducing such a practice, this official said. Misselling is wrong, but not incentives, he said.
The vicious cycle of misselling insurance products and incentives against such sales emanates from the fierce competition in India’s insurance sector.
This year until October, SBI Life Insurance held a market share of a mere 10.3% of the total life insurance industry, according to Life Insurance Council data. SBI General Insurance held only 2% of the market share. However, it is a crucial source of non-core income for banks.
SBI’s latest annual report shows that it has an agent network of over 2 lakh agents as of March 31. The bank earned a commission of Rs 2,040 crore from SBI Life Insurance Co. in the last financial year, up 30% from the previous year. Similarly, commission and fees earned through SBI General Insurance Co. rose 24% year-on-year to Rs 398 crore in FY23.
The RBI’s annual report of Banking Ombudsman showed that the number of complaints registered against the largest state-run lender under para-banking, which includes third-party product sales, stood at 384 in FY22, compared with 234 in the previous financial year.
The bank staff is forced to become certified insurance facilitators, the fourth person quoted above said. A CIF is a person who guides insurance buyers in the purchase of an insurance policy based on their financial profile. Such a certification requires bank employees to clear an exam.
Insurance is “purely a push product” and risks the trust of customers in the Indian banking system, said Harshvardhan Roongta, a certified financial planner at Roongta Securities.
“Banks are given heavy targets to sell insurance products, and if not for incentives, they may be under pressure to retain their jobs,” Roongta said. “It is an abuse of power against a customer who has gone to avail a loan... It is like a butcher house,” he said.
Banking Activities On Backburner
Rampant misselling of third-party products has drawn attention away from the bank’s core activity—advances and deposits, the third person quoted above said. Bank employees are unable to use their time for quality credit disbursals and ensure repayment of dues, which results in higher non-performing loans on a regional level, he said.
Even though regulators and SBI have restricted the incentivisation of bank employees for the sale of third-party products, the practice is still on. The extent of misselling of third-party products has lessened to 1–1.5% of SBI Life Insurance’s entire book through the bancassurance channel, a member of the officers’ union told BQ Prime.
The penalty put in place against misselling, however, is not proportionate to the extent of misselling as well as the monetary loss to customers. In 2016, the insurance regulator IRDAI was mandated to impose a fine of up to Rs 1 crore on insurance companies for misselling and violations of the code of conduct of their agents.
Moreover, for violating the code of conduct or misselling, the insurance regulator can impose a penalty of up to Rs 10,000 on the agents.
SBI should take penal action against people who are misselling, but it should be careful not to kill the golden goose, the former official quoted above said.