Banks differ with central bank on wealth management missive

Bankers don’t believe setting up a subsidiary for their wealth management services is necessary.

Written by Vishwanath Nair | Mumbai | Published:July 3, 2013 2:53 am

Bankers don’t believe setting up a subsidiary for their wealth management services is necessary. While they do agree its is essential to regulate this business,lenders say maintaining a strict watch on their business,with a customer centric approach would be a better approach.

“I think my view is that if you run it properly as a separate division with clearly identified process,it works,” said Uday Kotak,vice-chairman and CEO,Kotak Mahindra Bank,when asked about the subsidiary structure that the banking regulator talked about in its draft guidelines.

Reserve Bank of India (RBI),in its draft guidelines for wealth management services,had stated that banks would be able to conduct wealth management services either through a subsidiary or a special department. The draft guidelines,announced on Friday,also say the subsidiary would have to maintain arm’s length from the banking business,to ensure that their functions are kept separate from the bank. Similarly,in case of a special division or department,there needs to be a strict demarcation from other departments of bank.

“It should be ensured that there is no intermingling of the distribution and advisory role in case a bank is undertaking both the activities,” RBI said in the draft guidelines. According to consultants,since the wealth management portfolio of most Indian banks has been growing over the last few years,this would be the perfect time to introduce such guidelines.

“If you look at it,there is a need to push insurance products to their customers,but in case of wealth management,there is no such need. However,banks do it and there is misselling in these products,” said a senior consultant on conditions of anonymity. Consultants said that the message from the central bank is clear that banks should aim to earn a reasonable fee from the customer,rather than look for a commission in such services. In case of third-party products being sold by banks,the regulator wants no incentives directly or indirectly being given to the employees involved. RBI also states that these emplyees should not be given any cash or non-cash incentives by the third party as well.

“We have stopped all kinds of direct or indirect incentives to the employees,to avoid any misselling by them,” said A Surendran,head- retail and international banking,Federal Bank. Surendran also pointed out that,as such,the third-party products being sold by banks have come down this year.

The Kerala-based lender has a number of non-resident Indian clients and it invests in various financial products,depending on the mandate it receives from the customers. However,the bank does not perform any advisory services,Surendran said. The Indian wealth management space has recently seen two players exit from the business.

Swiss bank UBS announced last month that it will be winding down its commercial banking and wealth management business in India. This is part of the bank’s global strategy as it wants to focus on only its core functions.

New York-based Morgan Stanley,too,sold its India wealth management business to Standard Chartered PLC (StanC),in May. The move followed Morgan Stanley’s review of its India businesses,including  investment banking,asset management and institutional securities.

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