Banks' mutual funds pitch under scanner

Banks pressurised FD holders to switch to MF schemes; customers feel cheated.

Private sector and foreign banks, which have been aggressively pushing depositors to invest in mutual fund products, have come under the scanner of the regulator.

The Reserve Bank of India (RBI) has sent out notices to banks, seeking information on their activity as regards their cross-selling  third-party mutual funds, and churning the portfolio of their depositors.

Under pressure to achieve their sales targets, young bank executives often pressurise fixed deposit holders in banks to switch to mutual fund (MF) schemes.

They also encourage customers to churn their portfolios by exiting one scheme and investing in another as the net asset value (NAV) of mutual fund schemes appreciates.

In most schemes, customers have to pay a 1-2 per cent entry load when investing and an exit load when selling their mutual fund units.

The RBI's concern follows an alarming number of customer complaints received on depreciation in their principal investment. Many customers allege that they were not informed about the risk of the product they were sold.

Some bank customers feel they have been cheated of their money, which otherwise was kept in fixed deposits and would have earned them a fixed but regular income.

"Increasing MF sales that may not fully address customer needs may cause a regulatory concern," said Leo Puri, director, McKinsey & Company.

Banks gain from the sale of third-party products as such sales boost other income. The RBI fears that banks are "mis-selling" MF products driven by commissions, which are also partly shared with the bank employee hawking these products.

"Given the growing concern among consumers, banks will need to be more careful in ensuring proper risk management practices, as is the experience in other global markets," said Puri. A rising stock market has given banks a good opportunity to sell mutual fund products.

The RBI's concern stems from the fact that banks are licenced deposit takers and the central bank's job is to protect the industry on depositors' behalf.

"Every time the market goes up, new customers come into the investment stream and get affected," senior bankers said.