Stress Testing Methodology – Brief Comparison Across Regulators

By Nishanth K & Madhu Srinivas, IFMR Finance Foundation

The below table summarises, along some key dimensions, the stress testing methodologies adopted by the central banks in India, US, UK and EU to assess the stability of their banking system. It is to be noted here that the stress tests that individual banks conduct by themselves, as part of their Internal Capital Adequacy and Assessment Process (ICAAP), do not figure in our comparison. Also the below analysis is based on the stability/stress test reports of the respective regulators for the year 2016.

All data for the above comparison was taken from the following references:

Click here for PDF of the infographic.


Natural Catastrophe Insurance – In Conversation with Mr. Ulrich Hess

By Vipul Sekhsaria, IFMR Holdings

In the below video we share a brief conversation with Mr. Ulrich Hess, GIZ. Mr. Hess is currently a Senior Advisor, InsuResilience Initiative at GIZ, and has worked extensively in the field of natural catastrophe risk insurance market. In the video he shares his insights on the impact of natural disasters on the livelihoods of households and the risks associated with it. He also talks about the challenges in designing a natural catastrophe insurance product and addressing issues associated with both inefficiencies and effective delivery of the product.


Developing the Natural Catastrophe Risk Insurance Market for Low-Income Households in India

By Vipul Sekhsaria, IFMR Holdings

Natural disasters leave behind them a tale of death and destruction that affects the economy on the whole and severely impacts communities, especially low-income households, which bear its brunt. While little can be done to prevent natural calamities like floods, cyclones, drought etc. from occurring, what perhaps can and should be done is how best households, especially the vulnerable ones, can mitigate the financial losses that such calamities have on their lives.

Flood & Drought Risk

In terms of number of people affected, India tops the list of 163 nations affected by river floods as cited by World Resources Institute[1]. Close to 76% of India’s 7,516 km long coastline, is prone to cyclones with over 40 million hectares (12 per cent of land)[2] being prone to floods and river erosion. Floods can severely disrupt livelihoods, especially in low-resource settings. Flooded households are affected by a plethora of adverse conditions including food insecurity due to crop failure or affordability concerns due to sudden price changes. Daily care of children is importantly challenged during floods as in worst scenarios all basic services become disrupted, including water and sanitation conditions, or the provision of basic community health and social services.

Like flood, drought in India is also a major disruptor of financial well-being with 68% of the country being prone to it in varying degrees[3]. It is difficult to provide a precise and universally accepted definition of drought due to its varying characteristics and impact across different regions such as rainfall patterns, human response and resilience etc. Last year (2016) more than 300 million people living in 256 districts were affected by drought after two years of sparse monsoon rains[4]. The latest findings suggest that while there have been alternate dry and wet spells over the past three decades, the frequency and intensity of drought years has been increasing – for instance Tamil Nadu was declared drought hit in January 2017 after it recorded the worst rainfall in 140 years[5]. What’s important to note is that while the direct effect of drought could be on the farmer and the agriculture economy, but due to its high incidence, the local rural economy also gets severely affected thereby expanding its impact base beyond the farm sector to rural labourers and small rural businesses.

Natural Catastrophe (Nat-Cat) Insurance

Given the fragile economic livelihoods of the underlying households that microfinance institutions and small business lenders serve, even significantly diversified originators typically have a large percentage of their capital at risk in case of a localised natural catastrophe, resulting in a higher cost of capital. This leads to either no catastrophe cover or cover that is unaffordable to people living on low incomes. Further a majority of households never have access to any insurance that protect their assets and livelihoods in the event of a shock. The existing PMFBY (Pradhan Mantri Fasal Bima Yojana – Prime Minister’s Crop Insurance Program) is a restructured Weather Based Crop Insurance Scheme covering only Farmers – it does not take care of many other rural customer segments like Labourers, Small businesses that form 60% of the rural population. Even for farmers it doesn’t provide the much-needed liquidity during the constrained circumstances of a natural disaster like flood nor any protection towards assets other than crops (example: house & contents, livestock, other small holdings). The PMFBY structure is also highly subsidised by the government (to an extent of 90% subsidy)[6], which is a good first step to drive adoption, but without an exit strategy, the long term continuance of subsidy always remain questionable.

India was the first developing country to pilot weather indexed insurance and, despite the recent spread of weather indexed insurance programs across the world, more farmers purchase weather indexed insurance in India than in any other country. However, despite the large public subsidy, as mentioned above, a significant majority of India’s farmers have remained uninsured largely due to issues in design, particularly the long delays in claims settlement.

In terms of product development, designing an Index Based Parametric Cover is somewhat comfortable at a portfolio level rather than at the individual level (micro level), since at a portfolio level, rate makers have access to more managed data of the spread and concentration of assets across the geography. The return periods of the calamities and the portfolio data make it possible to arrive at a commercial rate for the Index Based cover. Recent experience suggest that while products are available but they are also limited to perils like Earthquake which are usually perceived as low-frequency event affecting a much smaller geography in India and therefore are of lesser demand as against for Flood and Drought.

More products for protection around Flood and Drought should also appear in the near future but cost of such solutions is yet to be evaluated. It’s worth mentioning here that, trigger of such portfolio level product results in a payoff to the risk originator (Micro Finance Institutions or similar) to cushion their own portfolio from delayed receipts of the loan repayments due to the stressed situation caused by the catastrophe. The challenge in this segment as it seems is that most originators who are already working on tight margins find it difficult to cover the cost of an earthquake protection product at a portfolio level and the high price still continues to be a dampener.

Designing a Nat-Cat Micro product

While the subject of Index Based Parametric cover is largely centred around loss of assets (whether fixed or movable), there has been very little or no work done so far as to protect the loss of Individual Income due to the incidence of perils like say, flood and drought, through an Index Based Parametric cover. The advantage of originating such cover is making the end consumer (micro level) ‘Nat-Cat-Resilient’.

The biggest challenge in developing the Nat-Cat Micro product is the absence of structured income data at the micro level. In absence of any close estimate of the different income profiles and the effect of Nat-Cat perils on this income, it is not possible to initiate the ratemaking of the risk – ‘Loss of Income’. Since the potential customers are mostly from unorganized sector, a great deal of primary research work will be involved in estimating the different income profiles of the constituent occupation classes.

To address this challenge we have undertaken a detailed primary research activity (details on which we will share in subsequent posts) to capture insights on the impact of natural calamities on income of rural customers, length of the impact as well as coping mechanisms. Joining in this detailed research work is a leading DFI (GIZ InsuResilience Direct Insurance Implementation Team) who has partnered with IFMR Holdings (IFMRH) in developing Catastrophe risk protection market along with weather based technical service provider based in India. In its current phase the goal of this project is to develop probability curves that can be externally assessed and then used to pilot differing approaches like the one detailed above as a “Micro Nat-Cat Product”. If successful, the aim would be to make these probability curves available to others to develop similar coverage and products to serve a much larger population in India.

As part of this blog series we intend to share insights from our research and interactions with expert stakeholders in subsequent posts.

[1] http://www.livemint.com/Politics/hjUVTrwyI0I4p4b4enBg1K/India-tops-list-of-nations-at-risk-from-floods.html
[2] http://www.worldfocus.in/magazine/disaster-management-in-india/
[3] http://www.ijesmjournal.com/issues%20PDF%20file/Archive-2017/Jan-Mar.-2017/4.pdf
[4] http://www.thehindu.com/todays-paper/tp-in-school/Reeling-under-dry-spell/article17052569.ece
[5] http://www.business-standard.com/article/economy-policy/ne-monsoon-worst-in-140-years-144-farmers-dead-tn-declares-drought-117011100782_1.html
[6] http://indianexpress.com/article/business/business-others/pradhan-mantri-fasal-bima-yojana-crop-insurance-plan-to-entail-rs-8-8k-cr-outgo/


A Brief Comparison of Ombudsmen Frameworks – Part 2

By Madhu Srinivas, IFMR Finance Foundation

Following our initial post on a brief comparison of grievance redressal mechanisms existing in India for financial services, at first glance it can be seen that there is considerable variation in the process elements among the various sector ombudsmen. This is indicative of varying processes, approach and service levels of the redress mechanisms. Let us delve on some common observations we made from the comparisons.

Recognition of Misselling, or a lack thereof

The Report of the Governing Body of Insurance Council (GBIC)[1] has made the following observation in its analysis of the complaints received against Life Insurers – “In most cases of mis-selling the financial underwriting rules have been disregarded by the underwriter. So mis-selling which could have been arrested at the underwriting stage instead gets an impetus when the underwriter clears long premium paying term plans even though the proposer does not have the paying capacity to maintain the policy beyond the initial first payment.

Our cursory analysis in the previous blog post[2] reveals that there is no recognition of unsuitable sale as a separate category of complaints (beyond process-level complaints). Current supervisory mechanisms also have minimal efforts directed towards systematic detection of conduct violations on a regular manner, such as for violations of affordability assessments across all lending channels, and if such efforts exist, they are not placed proactively by the supervisor in the public domain. There is therefore a systematic under-representation of, and a lack of adequate evidence on the extent of unsuitable sale to households occurring in today’s context (products being unsuited to client needs, unfair contract terms, misleading conduct and market practices of intermediaries and so on). There is inadequate information about ‘misconduct’ practices feeding back to regulators and supervisors providing no respite for consumers even in the longer run. This would substantially underestimate the occurrence of, and the costs to customers on being mis-sold unsuitable products, and consequently reduce the impetus for regulatory action on the same.

Feedback Loops into Regulation and Supervision

The grievance redressal function can act as a powerful feedback loop to the regulator and can inform their regulatory and supervisory approaches as well as actions. We cannot definitively conclude whether regular feedback loops exist and if they do, whether regulators take these as inputs into supervisory processes, and further into updations in regulations (simply because these are not available in the public domain).

However, we looked at requirements placed in the respective Ombudsmen Schemes to see if such requirements are there on paper atleast. We found the following requirements which we think are inadequate for the purpose:

  • From the Banking Ombudsman Scheme[3]The Banking Ombudsman shall send to the Governor, Reserve Bank, a report, as on 30th June every year, containing a general review of the activities of his Office during the preceding financial year and shall furnish such other information as the Reserve Bank may direct and the Reserve Bank may, if it considers necessary in the public interest so to do, publish the report and the information received from the Banking Ombudsman in such consolidated form or otherwise as it deems fit.”
  • The Governing Body of Insurance Council (GBIC) has been established under Redressal of Public Grievances Rules 1998 (RPG), to set-up and facilitate the Institution of Insurance Ombudsman in India. From the RPG “The Ombudsman shall furnish a report every year containing a general review of the activities of the office of the Ombudsman during preceding financial year to the Central Government and such other information as may be considered necessary by it. In the Annual Report, the Ombudsman will make an annual review of the quality of services rendered by the insurer and make recommendations to improve these services.” [4]

The Report of the FRA Task Force[5] points out that “a large number of complaints on a particular issue (for example, misselling in Unit Linked Insurance Plans (ULIP) resulted in consumers losing more than a trillion rupees over the 2005-2012 period) reflect regulatory and supervisory gaps, creating a conflict of interest unless feedback from complaints flows to the regulator through an independent mechanism.” It has recommended the requirement for a research team under the proposed FRA to analyse complaints data and provide feedback to the regulator on areas for improvement in regulation or supervision[6]. We can therefore conclude that such feedback loops do not exist currently.

Powers of ombudsmen/regulators to take action against non-compliant providers

There seems to be a patchy framework around powers of ombudsmen and even the regulators to take action against financial services providers who do not comply with an award made by the Ombudsmen.

RBI / Banking Ombudsman

Section 35A(1) of Banking Regulation Act, 1949, empowers the RBI to give directions to the banking company, where it is satisfied that such directions

– are in the interests of public

– are in the interests of the banking policy

– are to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company;

The banking company is bound to comply with such directions.[7]

SEBI SCORES In case of non-redress of a grievance by an intermediary after having being called upon by the SEBI Board in writing to redress the grievances of investors, then such an intermediary shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees[8]
IRDAI / Insurance Ombudsman

The GBIC cannot penalise Insurance companies for not complying with the award given by it.

Currently, there are no penal provisions available in the RPG for the non-implementation of the award passed by Insurance Ombudsman. Section 16(2) of the RPG provides that the Ombudsman cannot award compensation for an amount exceeding twenty lakh rupees. The compensation cannot exceed the amount that covers the loss suffered by the complainant as a direct consequence of the insured peril. [9]

Unregulated, unlicensed or illegal services

The current redress mechanisms do not admit complaints arising from unregulated, unlicensed or illegal services. The only recourse left to victims in such cases is to approach the police and the courts. This is a big lacuna in the redressal mechanism and it needs addressing. One of the more recent attempts to fill this lacuna is RBI’s Sachet initiative.

To sum up, it is clear that there is significant variation among the grievance redressal mechanisms in place for the Banking, Insurance, Pensions and Capital Market sectors. There is a very strong case to be made for the creation of the Financial Redress Agency (FRA) as the single agency that can act on behalf of aggrieved customers – an idea that is not new and one that has been effectively set up and is running in many other jurisdictions.

[1] Pg 33 Consolidated Annual Report of the office of the Governing Body of Insurance Council (GBIC), 2015-16
[2] http://www.ifmr.co.in/blog/2017/04/10/a-brief-comparison-of-ombudsmen-frameworks-part-1/; https://ajayshahblog.blogspot.in/2017/01/establishing-financial-redress-agency.html
[3] https://rbidocs.rbi.org.in/rdocs/Content/PDFs/67933.pdf
[4] http://www.gbic.co.in/notification/Redressal%20of%20Public%20Grievances%20Rules,%201998%20-%20copy.pdf
[5] Pg 10, Report of the Task Force on Financial Redress Agency, Government of India, June 2016
[6] Pg 15, Report of the Task Force on Financial Redress Agency, Government of India June 2016
[7] Pg 142 Report of the Task Force on Financial Redress Agency, Government of India June 2016
[8] See Section 15C of Securities and Exchange Board of India Act, 1992
[9] See Page 32 of the GBIC, Consolidated Annual Report of the Governing Body of Insurance Council & Offices of the Insurance Ombudsmen for the year 2014-15. Also, See Pg 143, Report of the Task Force on Financial Redress Agency, Government of India, June 2016


A Brief Comparison of Ombudsmen Frameworks – Part 1

By Madhu Srinivas, IFMR Finance Foundation

This is the first of a two-part blog series on the state of Grievance Redress in the Indian Financial System.

An independent grievance redress function that financial services consumers have access to, in the event of less than satisfactory resolution of one’s grievances by the internal grievance redressal processes of financial services providers, is an important piece of the larger customer protection frameworks in place for India (albeit one that is limited to being ex post in nature). Such an external grievance redressal mechanism has an important role to play in market conduct supervision. The redress function can potentially serve two important purposes:

  1. Misconduct by firms imposes costs on society and may damage the confidence in the financial system. This could fuel a retreat of users of financial services from the formal system. An effective and quick redress mechanism would mitigate this problem to a large extent[1]
  2. The analysis of complaints received through the redress mechanism, in particular, for their impact on institutional and systemic stability, could inform future regulation/regulatory action on micro-prudential and market conduct aspects.

While much has been written about prudential regulations and systemic stability, especially in today’s scenario of stressed banking balance sheets, regulations for ensuring market conduct have received relatively little attention, with a significant part of the focus being limited to the possible creation of a Financial Redress Agency (FRA), as envisaged by the Financial Sector Legislative Reform Commission (FSLRC). More recently, in June 2016, the Task Force set up by the Government of India for establishing the FRA submitted its report that covered an implementation plan to operationalise such a statutory FRA (the report was made available for public comment in December 2016).

Taking a step back, in this post, we carry out a short comparative assessment of the nature of redress systems in the Indian financial sector, along specific metrics, to give a more nuanced sense of differences in approach and effectiveness (without necessarily concluding whether one system is more successful than the other). For the sake of simplicity we take into account only the external grievance redress mechanism in the Banking, Insurance, Pensions[2] and Capital Markets sectors and contrast these with the Financial Ombudsman Service of Australia as a benchmark for comparison[3]. The below table[4] summarises, along certain metrics, the existence or otherwise of certain elements of the redress mechanisms, and a more detailed analysis follows it. It is to be noted that large categories of institutions remain left out of current systems – a case in point is a complaint against an non-banking financial company (NBFC) or a non-bank Prepaid Payment Instrument Provider (PPI). There are also jurisdictional uncertainties such as for annuities and pension products provided by insurance companies for instance.

Financial Ombudsman Service, Australia RBI Banking Ombudsman SEBI SCORES Insurance Ombudsman[5]
Channel for Complaint Submission
Online lodging, toll-free calling lines, E-mail, letter, fax and in person Offices in 18 locations in India, online lodging Online lodging, toll-free calling lines Offices in 17 locations in India, online lodging, toll-free calling lines
Classification of disputes
Disputes are classified under various dimensions such as – complexity of dispute, demographic characteristics of disputants, nature of financial service, issue involved and so on. Disputes are classified under various dimensions such as – product type, demographic characteristics of disputants, legal status of the disputant, FSP against which the dispute has been raised, nature of dispute. Disputes are classified under two main dimensions –

1. Entity against which dispute has been raised and

2. Nature of dispute raised.

However, the second dimension did not have any further categorisation.

Disputes are first separated as being related to either Life Insurance or General Insurance and then further classified by – Geographical origin of dispute, FSP against which the dispute has been raised, Nature of dispute. The categories under Nature of dispute are along operational lines, for instance partial or total repudiation of claim, delay in settlement of claims.
Whether ‘mis-selling’ is captured as a separate category
‘Mis-selling’ is not an explicit category under which disputes are classified, but disputes are classified under categories that have further broken down mis-selling, such as – Failure to act in client’s best interest, Inappropriate advice, Incorrect advice and so on. No such categorisation. However, there is a section on mis-selling of third party products (insurance and pension) in rural areas in Annual Report 2015-16 – it is therefore not capturing misselling of pure banking products such as loans, FDs. No recognition of mis-selling, either implicitly or explicitly. Though there is no explicit or implicit mention of mis-selling, there is a separate classification of complaints against (only) life insurers, which includes a category “Unfair Business Practice”[6].
Classification based on the Financial Services Provider (FSP) against whom grievance has been raised
No. The Terms of Reference of the FOS mandate it to keep confidential all information pertaining to a dispute, subject to certain conditions. However, the FOS is required to report information about the disputes to the Australian Securities and Investments Commission (ASIC). Yes Yes Yes
Classification based on the complexity/ severity
Yes, complaints are categorised into Fast-track, Standard and Complex – along increasing complexity and increasing time spent to close. No No No
Satisfaction level of the complainants
Yes, a yearly survey is conducted by FOS to ascertain the satisfaction level of the complainants There is no systematic process of doing surveys to ascertain the satisfaction level of the complainants. However a sample survey was conducted last year, in the New Delhi Region, to ascertain the reason for the high spurt in complaints in that region. This survey also included questions on the satisfaction level of the complainant with the Ombudsman[7] Yes, SEBI is currently conducting an independent survey to gauge the efficacy of the redressal mechanism. It is unclear if this will be a regular feature or a one-off occurrence. No
Disclosure of names of erring financial institutions, agents
No. The Annual Review Report 2015-16 contains no names of any FSP or its agents. Yes. The annual report, 2015-16, has a table which lists the number and type of dispute raised against each bank. For instance State Bank of India had 1172 complaints raised against it pertaining to deposit accounts in the year 2015-16. It should also be noted that the annual report carries sample case studies of exemplary complaints received by the banking ombudsman. Though these case studies are anonymised and the name of the bank is not revealed. Yes. The SCORES website has entity wise numbers on Pending complaints against them. This information is updated regularly. Yes . The Annual Report 2015-16 of the Governing Body of Insurance Council (GBIC) has various tables which list the number of complaints, nature of complaints, time taken to dispose the complaint for each entity against which complaints were received.[8]
Feedback loops to regulators
As mentioned in their 2015-16 report, the FOS is required, as per the ASIC regulatory guide 139, to report on systemic issues and notify Australian Securities and Investment Commission (ASIC) of cases of serious misconduct. In connection with this, FOS reported 58 cases of definite systemic issue in 2015-16 There is no explicit mention of any feedback being given to the regulator. However, the latest annual report of the banking ombudsman mentions as one of its goals – “To provide policy feedback/suggestions to Reserve Bank of India towards framing appropriate and timely guidelines for banks to improve the level of customer service and to strengthen their internal grievance redress systems” No such mention anywhere. The annual report of the GBIC gives a brief analysis of the complaints received and makes certain suggestions based on this analysis. However, it is unclear if the audience is only the regulator or if it includes insurers and other market participants.
The Body or Authority to make appeal to
The Australian courts are the appellate authority The Deputy Governor-in-Charge of the department of RBI administering the Banking Ombudsman Scheme (Consumer Education and Protection Department) is the designated Appellate Authority Securities Appellate Tribunal (SAT) Consumer/High courts of India
Details about number of cases that went to appeal
Not Given 34 awards went to appeal for the year 2015-16 Not Given Not Given
Disclosure of Total Disputes Received, Total Closed
Yes Yes Yes Yes
Disclosure of average number of days to close a dispute
Yes, 62 days No Yes, 36 days No
Age Profile of closed disputes
Yes No but the age profile of open disputes is given Yes[9]. It is given as the number of disputes closed in buckets of – 0-30 days; 31-160 days; 61-90 days and so on till More than 360 days. Yes. It is given as the number of disputes closed in three buckets – Less than 3 months; 3 months to 1 year; Greater than 1 year.

The colour coding is provided to indicate a rudimentary comparative picture, moving from green through yellow to amber, to indicate good (existence of adequate practice for a metric) to bad (no evidence for existence of any practice for the metric).

Overall, we see that there exists a set of external grievance redress forums available today, albeit ones that are varied in completeness and effectiveness and provide a fragmented set of protections for aggrieved consumers. In the next post we take a deeper look at the observations made above and briefly analyse them.

In case you have difficultly in viewing the table please click here.

[1] https://www.esrb.europa.eu/pub/pdf/other/150625_report_misconduct_risk.en.pdf

[2] We have excluded the grievance redressal mechanism of the Pension Fund Regulatory and Development Authority of India as they currently regulate only 2 products and also score adversely on almost all the metrics.

[3] The colour coding is provided to indicate a rudimentary comparative picture, moving from green through yellow to amber, to indicate good (existence of adequate practice for a metric) to bad (no evidence for existence of any practice for the metric).

[4] All the data used to populate the below table came from the following sources –
Report of the Task Force on Financial Redress Agency, Government of India June 2016
The Banking Ombudsman Scheme 2006, Reserve Bank of India(RBI), Annual Report 2015-16
Securities and Exchange Board of India(SEBI) Annual Report 2015-16
SEBI Complaints Redress System website – http://scores.gov.in/Reports.aspx?Tab=0
Consolidated Annual Report of the office of the Governing Body of Insurance Council (GBIC), 2015-16
Pension Fund Regulatory and Development Authority(PFRDA) Annual report, 2013-14
Insurance Regulatory and Development Authority of India (IRDAI) , Annual report 2015-16
Financial Ombudsman Service, Australia. Annual review 2015-16
[5] The Insurance Ombudsman is provided with a Secretarial Staff by the Governing Body of Insurance Council and such staff is drawn from Insurance Companies. http://www.policyholder.gov.in/FAQ_on_Ombudsman_Scheme.aspx
[6] http://www.policyholder.gov.in/uploads/CEDocuments/Classification%20of%20Complaint%20Life%2015-16.png
[7] The Banking Ombudsman Scheme 2006, Reserve Bank of India(RBI), Annual Report 2015-16
[8] http://www.policyholder.gov.in/Life_Grievances_Analysis.aspx
[9] This information is not available publicly, and/or periodically. It was obtained from the Report of the Task Force to set up Financial Redress Agency (FRA), 2016