When banks take you for a ride

A recent opinion article, on banks, in a business daily, prompted me to read the contents of a speech (from which the article had quoted) by Dr. K.C Chakrabarthy, Deputy Governor, RBI at a bank CEOs’ roundtable in Udaipur this month.

The speech revolving around the issues and challenges in Retail (mass) Banking gave a blunt and powerful message:

For retail banking model to be successful, pricing of products (deposits and loans) should be non-discriminatory, risk-based, competitive and value added.

The Deputy Governor went on to add “Believe me, if you wish your retail banking to succeed, you would have to address this deficiency at the earliest. Else, as I hinted earlier, the regulators/supervisors would no longer be as tolerant in imposing penalties and issuing strictures as earlier”.

Here are some of the points that he raised about banks’ discriminatory ways in serving customers and their innovative ways when it comes to fleecing customers:

Discriminatory pricing

 The Deputy Governor stated that pricing of retail banking products and services were highly weighed against the retail customer. There was evidence of:

–          different interest rates being paid by banks on deposits  for the same tenure within the same bank

–          Different lending rates adopted by  bank on a standardized product such as an automobile loan

The above instances indicate that banks exploit the information arbitrage among customers to their advantage.

Fleecing customers with charges

 Banks charge for non-maintenance of minimum balance in an account, levy  cheque-return charges and charge even when no service has been provided – that is for customers not conducting any transaction.

The Deputy Governor asks why a customer should be charged a second, third and fourth time for not maintaining the minimum balance; so much so that the balance actually becomes negative. He asks why the customer cannot be informed after the first instance and the account closed or converted in to a basic savings account.

Need for differentiated products

 The Deputy Governor stressed the need for appropriate products and services for different groups of customers. A migrant labourer in a city and a labourer in a village may have similar balances in their account but their requirements would be different. There is a need for banks to inculcate a habit of listening to customers’ needs and building analytics based on interaction to design the right products.

Disclose real yields

 The Deputy Governor also raised questions on why banks do not disclose the real yields on both customer deposits as well as the effective borrowing cost for customers on their loans.  In fact the yield claims of some banks on deposits are neither correct nor comparable with the usual compounded annual yields of other investment products

How Mutual funds score in this regard

In this regard, while it may not be an apple-to-apple comparison, it is interesting  to see how yet another financial services industry fared; an industry that also garners retail money and makes a business out of it. We are talking about the mutual fund industry.

Think about how mutual funds score on these parameters. You will realize that mutual funds, as financial products, are ahead of banking products in terms of product innovation, transparency and value-added services.

They already comply with the key requirements mentioned by Mr. Chakrabarthy  for retail banking. They are:

Non-discriminatory – Mutual funds do not discriminate between the returns they offer you and what they offer me. The only differentiation which was in the form of separate plans for institutions was also done away with a year ago, thus placing all investors on a level platform.

Risk-based:  Mutual funds offer an array of products suiting different investors with varying risk profiles. The product types are classified for investors with different risk appetite and the recent colour coding has helped provide a better idea for a layman to understand a product’s risk.

Competitive: Performance scores at the end of the day for every fund and as an investor you have all the flexibility to move towards schemes that sport a superior track record. You are not punished with exorbitant charges for trying to shift schemes, the way it is with your loans.

Value-added: Mutual funds have come a long way in providing options such as international funds, hybrid funds and ETFs; products that not only provide diversity but offer enhanced features.

Transparency: Mutual funds are among the few financial products that disclose their expenses as well as their assets (NAV) regularly. Can any of us, say with confidence – what charges are debited to our bank account and what hidden costs go into our loan account? Funds, on the other hand,  mutual funds disclose all the expenses you bear on a regular basis.

Step out and look beyond

And yet, a chunk of Indian investors’ financial savings lie in banks! Yes, market-linked instruments such as mutual funds cannot guarantee fixed returns like bank deposits but then, they are market linked –  that means, no large layer of profit is snatched from you. Remember, it is not the same with banks.

Not so long ago, the miserable interest that you were paid on your savings account (not that it is any high now) by taking the minimum balance in your account is an example of how arbitrary banking products and services can get.

When viewed against the exorbitant/arbitrary charges that banks levy, whether on your account, your card, cheque or your loan transactions for arbitrary servicing mentioned above, you will see that the expense ratio charged by mutual funds for actively managing your money cannot be termed unreasonable.

Starting from simple, efficient products such as liquid funds to long-term wealth builders such as equity funds and income funds, mutual funds offer a wide spectrum of products that charge expenses  based on the level of active management involved (a liquid fund or an index fund will have very low expense ratio when compared with a diversified equity fund).

Above all, the ease and flexibility with each an investor can switch across mutual fund schemes (especially made easier in online platforms such as FundsIndia.com) has come to mean that the ‘investor is king’ when it comes to choosing mutual fund products.

As investors, even as it may be time to raise your voice with your banking ombudsman, it may equally be an opportune time to look beyond the walls of banking products, for your investment needs.