Forex

Forcing those who have availed of housing loans to go in for housing loan-specific insurance is understandable since the bank, apart from safeguarding the funds it has lent helps the borrower’s dependents in mitigating their financial burden.

ACCORDING TO press reports, prospective borrowers are being arm-twisted into insuring their lives with the lending bank. Suppose the prospective borrower does not budge, what becomes of the loan application? Will it be rejected? Yes, but this message is driven home rather covertly. The bank in question tells the prospective borrower that insuring with it will greatly improve the chances of the loan being approved. Frankly speaking, this practice of arm-twisting the customer into buying a product that he / she does not want has been practised by banks, including nationalised banks. While the latter was discrete about it, the private sector banks were brazen about it. Your truly, in his earlier innings as a banker, used this strategy (!) to improve the deposit figure of his branch. How? A customer who placed a hefty sum in a fixed deposit account was allotted a locker immediately upon request. The less fortunate ones had to wait for years since ‘there was always a long queue for lockers’. Well, since yours truly is now literally on the other side of the counter with no obligation to achieve the ‘deposit’ target, a confession will be in order.

Be that as it may, this practice (or is it malpractice?) of arm-twisting the prospective borrower into buying an insurance product from the bank is resorted to by those banks which have their own insurance arms or those banks which market the products of an insurance provider. As long as the customer is a willing buyer of the insurance product there can arise no question of the customer being arm-twisted into buying the said product. But why do banks fail to understand that bank customers being an enlightened lot will not be averse to buying an insurance product when it is going to be beneficial to them? In fact, they would welcome it since they can avail of banking and insurance services under the same roof. Also, the money needed to buy the insurance product can be straight way drawn from their bank account with their mandate, thereby obviating the need to carry physical cash or the cheque book. If at all they are averse, the most probable reason is that they already have the product the bank is now marketing. After all, banks entered the insurance business, directly or indirectly, much later. In the circumstances, if the customer already has the product that the bank tries to market now, can the former be blamed? What prevents the bank from designing an insurance product that is not in the market and hence the prospective borrower will easily try out the new product? Why should banks try to force run-of-the-mill insurance products on reluctant customers? Innovation, unfortunately, has not been a forte of our banks, in particular, the nationalised banks. It goes without saying that such arm-twisting tactics on the part of the bankers-cum-insurers will invite the wrath of the regulators, viz., the Insurance Regulatory and Development Authority (IRDA) and the Reserve Bank of India (RBI) as well.

Forcing those who have availed of housing loans to go in for housing loan-specific insurance is understandable since the bank, apart from safeguarding the funds it has lent, also helps the borrower’s dependents in mitigating their financial burden in the event of the unfortunate demise of the borrower (vide, ‘Analysing the various aspects of housing loans’, dated Mar 26, 2007). But according to the foregoing press report, a borrower who took a personal loan of Rs 1.3 lakhs from a bank was arm-twisted into buying an insurance product that cost the borrower a cool Rs 12,000, accounting for around 10 percent of the loan. In other words, the bank sanctioned the borrower a loan of 1.18 lakhs (1,30,000-12,000) but will collect interest on the entire sum of Rs 1.3 lakhs.

n what way the bank is different from Shylock?

What takes the cake of course is that some banks, according to the report, indeed carry a column for insurance that says explicitly that ‘efforts will be made to pursue the loanee to go in for insurance’. It is time the RBI governor went after these bankers-cum-insurers they way he went after the reality developers. He should warn the bank bosses against forcing insurance products on prospective borrowers particularly where they are not warranted. As said earlier, in the case of housing loans, such a compulsion is justified, in the interest of the lender and the lent.