RBI pulls up Axis Bank over contests to generate business

An internal contest that Axis Bank held last year to reward top performers generating business has come under the scanner of the Reserve Bank of India (RBI).

In October 2023, Axis Bank floated the Achievers' Club contest in its rural business vertical to reward performance in various categories. It said top performers would be rewarded for raising high-value current accounts, forex income or term deposits and meeting loan disbursement targets. Winners were to be felicitated at various domestic and foreign locations.

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In a communication sent to the private bank, the RBI said the rewards "were in direct contravention of extant guidelines" and that staff were given incentives over and above their variable pay. Mint has seen a copy of the Axis Bank contest announcement as well as relevant portions of the regulator's observations.

“We are proposing a contest to build momentum, particularly in Q2 and Q3 — which is (the) most challenging period of the year — for the overall business and to motivate the sales team to deliver superlative performance during (the) contest period,” an Axis Bank internal note said in October. The contest was open for the wholesale and retail units of Bharat Enterprises, a part of Axis Bank's unit which serves rural customers.

Citing an analysis, Axis Bank said that in one of the contests where 103 employees could have become eligible for rewards, the cost would be ₹75 lakh, while it was expected to earn incremental revenue and fees of ₹4.86 crore for the bank. Similarly, in another contest, the bank concluded that by spending ₹15.75 lakh on 25 eligible employees, it could earn ₹2.7 crore in revenue and fees.

No incentives allowed

However, RBI guidelines forbid lenders from offering incentives for raising deposits. According to its 2016 directions on deposit rates, banks cannot “offer prize/lottery/free trips (in India and/or abroad), etc or any other initiative having (an) element of chance for mobilizing deposits”. But they are free to give inexpensive gifts of not more than ₹250, at their discretion, to depositors at the time of accepting deposits.

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“Scheduled commercial banks shall not pay any remuneration or fees or commission or brokerage or incentives on deposits in any form or manner to any individual, firm, company, association, institution or any other person except (in certain cases),” as per RBI regulations.

These exceptions include commission paid to agents employed to collect door-to-door deposits under a special scheme; those paid to direct selling agents or direct marketing agents as part of the outsourcing arrangements; and remuneration paid to business facilitators or business correspondents.

A senior banker who has served on the boards of several lenders likened the practice to how insurance companies once used to market their products to bank customers through bancassurance tie-ups, adding such internal contests are not very common at banks nowadays.

Emails sent to RBI and Axis Bank remained unanswered.

Compensation off purview

According to two central bankers, one of whom is retired, the regulator does not interfere in bank employees' compensation, and there are no specific guidelines around targets and what incentives banks pay on achieving them.

“Staff compensation is left to the bank’s board. However, RBI could point out its displeasure in cases where such incentives could lead to mis-selling,” the former RBI official said. Since these guidelines also mention depositors as being incentivized, banks might have interpreted it as not being applicable to employees, the former official said on the condition of anonymity.

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The regulator has now given Axis Bank an opportunity to respond to its observations and explain the rationale for the contest. There have been cases where the RBI has accepted the reasoning provided by regulated entities and withdrew its observations, the former RBI official said.

Mis-selling worries

Experts said RBI's intervention raises the question of whether the regulator is concerned about the potential for mis-selling or the structure of the rewards itself.

“While RBI typically does not interfere in staff salaries or incentive schemes, this move suggests that the regulator may be looking into whether such rewards encourage aggressive sales tactics, leading to mis-selling of financial products like CASA,” said Suma R.V., partner, King Stubb & Kasiva, a law firm. “The nature of foreign and local trips as incentives could push employees to prioritize short-term sales goals over long-term customer interests, something the RBI seems keen to avoid.”

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Others said that increased regulatory scrutiny on mis-selling is essential to protect consumer interest and promote transparency in the financial sector.

“This move will help prevent deceptive practices and reinforce ethical standards. It is a significant step towards rebuilding public confidence in banking and will help curb unethical practices and ensure that banks prioritize fair treatment of customers,” said Rahul Sundaram, partner, IndiaLaw LLP.