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As banks in India diversify beyond traditional lending, a silent but significant shift is reshaping their balance sheets. A growing share of income is now coming from commissions, broking,
and distribution, signalling a new era in banking where fee-based earnings are taking centre stage.
According to a recent study conducted by 1 Finance Magazine, there is a sharp increase in the role of commission, exchange and broking in the income mix of major Indian banks. The analysis
of their FY24 standalone statements revealed that in some private banks, such income constitutes more than 25% of the total income, up from single digits in 2004, indicating a significant
transformation in banking revenue models.
Private banks have rapidly expanded fee-based revenue, capitalising on retail product distribution, while public banks show relatively modest movement.
This is further to 1 Finance magazine’s last year’s survey of 1,655 bank relationship managers (RMs), where 57.56% of them admitted that they are told to mis-sell financial products to meet
sales targets, raising serious concerns around customer interest and financial ethics.
“Banks have garnered the highest level of trust in the entire financial ecosystem. Any person coming from a bank is assumed to be trustworthy by most bank customers. Due to this trust, most
buyers fall for the lucrative promises in the illustration of such products, which misrepresents the annualised returns,” said Keval Bhanushali, co-founder & CEO of 1 Finance.
Traditionally, banks primarily earned via interest income on loans. However, the past two decades have seen a consistent rise in income from third-party product distribution (insurance,
mutual funds, etc.), signalling a structural shift in the revenue landscape of Indian banks.
“Low financial literacy makes these fancy presentations and illustrations gullible to anyone. It's high time that core retail banking and the distribution of commission-driven products are
separated. The customers are arm-twisted to buy high-commission financial products while availing essential services like loans or applying for lockers, etc.,” Bhanushali added.
Commission income includes those on insurance referral, referral of mutual funds, mobile banking fees, credit/debit card fees, fee for bill collection, service fee, etc.
At the same time, the soaring of this ratio within a bank’s income mix is not the biggest concern. It is the increasing proportion of insurance referral fees.
Within commission income, the proportion of insurance referral fees has been swelling across all banks (be they private or public), except ICICI Bank, in the last decade.
Life insurance products are pushed to customers every now and then; however, it is no secret that they are extremely high-cost products with low liquidity and high exit barriers. Despite all
these disadvantages, most fixed-return plans fail to make any real returns for customers.
Bank RMs claim that their banks make 65% commission on the first-year premium of an endowment life insurance product.
The increasing reliance on commission income raises questions about financial product sales practices, as indicated by our survey, where most relationship managers reported being pressured
to mis-sell products.
Kanan Bahl, Chief Editor of 1 Finance Magazine, deep-dived further: “Banks have an unfair advantage in terms of the intelligence of customers, income, savings, expenses, etc. Whenever you
visit a bank branch or even when you call your RM, the focus is to push-sell financial products that make huge commissions rather than serving the customer as per their requirements. This is
not at all aligned with the customer interests and must be done away with.”
Overall, this trend reflects a transformation in banking revenue models, but it also underscores the need for transparency and ethical sales practices to ensure customer interests are
safeguarded.