Sale of AT-1 bonds to retail bank account holders should serve as a wake-up call to RBI

After the RBI invoked contract terms to seek a complete write-off of YES Bank’s Additional Tier-1 bonds (AT-1 bonds) in its bailout package, mutual funds and other institutional holders are exploring legal and other options to see if they can salvage something out of the ruins. But one set of investors who are still reeling from the shock are the unexpectedly large number of retail folk who seem to be saddled with these risky instruments. A BusinessLine report chronicles disturbing stories of home-makers and senior citizens being lured into switching their bank balances into AT-1 bonds for extra returns, without being told that these perpetual instruments carried coupon discretion, loss absorption and principal write-off clauses. This is not the first time that retail savers seeking to park safe money with banks have been diverted to high-risk products that are highly unsuitable to them. The media abounds with horror stories of farmers being signed up for high-value ULIPs in return for loan sanctions and celebrities finding their life savings emptied by wealth managers. Anyone who maintains a reasonable savings balance can testify to the pressure from their banks’ relationship managers to sign up for endowment plans, ULIPs, portfolio management schemes or equity SIPs without regard to the risks.

In recent years, the Securities Exchange Board of India (SEBI) has been quite stringent in drawing clear red lines between commission-earning distributors and fee-based investment advisors, with the former barred from even describing themselves as advisors. Mutual fund intermediaries must make clear disclosures of any conflicts of interest arising from dependence on product manufacturers for commissions, junkets or incentives. Advisors must undertake comprehensive risk profiling and suitability assessments of their clients in writing, before offering any products. But neither the insurance regulator nor the RBI have shown any inclination to follow SEBI’s cues to crack down on mis-selling by their constituents.

Relationship managers in banks remain mostly unaffected by SEBI’s diktats, because they act as representatives of their bank in plugging products and don’t earn direct commissions from product sellers (their bonuses are linked to the bank’s fee income targets instead). Instead of regulating this, the RBI relies on a code of conduct to prevent bank staff from indulging in mis-selling. It was only in June 2017 that it even allowed the mis-selling of third-party products as one of the grounds for customers to complain to the banking ombudsman. The Banking Ombudsman Report for 2019 reveals that such complaints have jumped from 579 to 1,115 in a year. But the Ombudsman scheme’s record in providing consumer redress is mixed, with over half the complaints rejected as non-maintainable. This provides a free pass for banks to continue with misleading product pitches to hapless retail savers. The AT-1 bond débâcle should serve as a wake-up call to the RBI. It needs to admit that it hasn’t done enough to curb the rampant mis-selling by banks and take concrete steps to fix the issue.

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