iconimg Friday, September 04, 2015

Dhirendra Kumar, Hindustan Times
New Delhi, July 15, 2013
If you go to a doctor with a complaint, then you would expect that the treatment recommended reflects the diagnosis of the disease.

If the doctor remains silent and starts treatment, even then you can figure out what is going on. A cast on your leg would imply a broken limb and not a viral fever.

That’s a reasonable deduction.

If one applies this principle to the Reserve Bank of India’s recent draft guidelines on wealth management services offered by banks, the deduction is nothing short of a puzzle.

These guidelines were triggered by the Cobrapost sting that implicated a number of banks of helping their customers invest unaccounted money and selling unsuitable products.

RBI’s guidelines mainly state that banks can deploy such services only through a separate divison so that employees are not selling other products; that employees do not take commissions directly from other companies; that a bank board formulates policies to address mis-selling and redress grievances, among other things.

The guidelines imply that bank employees have been stepping out of line and bank managements haven’t paid enough attention to prevent these malpractices. The RBI has expressed faith in bank boards to formulate policies to address these issues.

But, what if in order to enhance profitability, the bank’s board and management create incentive structures that encourage mis-selling and aggressive practices? Everyone who understands how banks work in reality knows what is truly happening.

Everyone except the RBI.