An internal competition that Axis Bank organised last year to reward the best business generators has come under scrutiny by the Reserve Bank of India (RBI).
In October 2023, Axis Bank launched the Achievers’ Club contest in its rural business vertical to reward performance across various categories. It noted that top performers would be rewarded for generating high-value current accounts, foreign exchange earnings or term deposits and meeting loan disbursement targets. Winners would be felicitated at various domestic and overseas locations.
In a communication sent to the private bank, the RBI said the rewards were “in direct contravention of existing guidelines” and that staff were receiving incentives in addition to their variable pay. Mint has seen a copy of Axis Bank’s bankruptcy notice as well as relevant parts of the regulator’s observations.
“We are proposing a contest to generate momentum, particularly in the second and third quarters, 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 internal Axis Bank memo said in October. The contest was open to wholesale and retail units of Bharat Enterprises, a part of Axis Bank’s unit that caters to rural customers.
Citing an analysis, Axis Bank said that in one of the contests where 103 employees could have been eligible for rewards, the cost would be ₹75 lakh, while incremental revenues and fees were expected to be ₹4.86 crore for the bank. Similarly, in another tender, the bank concluded that by spending ₹15.75 lakh on 25 eligible employees, could win ₹2.7 crore in revenue and fees.
Incentives are not allowed
However, RBI guidelines prohibit lenders from offering incentives to attract deposits. According to its 2016 guidelines on deposit rates, banks cannot “offer prizes/lotteries/free trips (in India and/or abroad) etc. or any other initiative having (an) element of chance to mobilize deposits.” But they are free to give monetary gifts of not more than ₹250, at its discretion, to depositors at the time of accepting deposits.
“Scheduled commercial banks shall not pay any remuneration, fee, commission, brokerage or incentive on deposits in any form or manner to any individual, firm, company, association, institution or any other person except (in certain cases),” according to RBI regulations.
These exceptions include commissions paid to agents employed to collect deposits door-to-door under a special scheme; those paid to direct sales agents or direct marketing agents as part of subcontracting arrangements; and remuneration paid to business facilitators or business correspondents.
A senior banker who has served on the boards of several lenders compared the practice to the way insurance companies used to market their products to banking customers through bancassurance arrangements, adding that such internal competitions are not very common in banks today.
Emails sent to the RBI and Axis Bank remained unanswered.
Out-of-competition compensation
According to two central bankers, one of whom is retired, the regulator does not interfere in the compensation of bank employees and there are no specific guidelines on targets and the incentives banks are paid to achieve them.
“The remuneration of staff is left to the board of directors of the bank. However, the RBI could express its displeasure in cases where such incentives could lead to mis-selling,” the former RBI official said. Since these guidelines also mention depositors as incentivised, banks could have interpreted them as not applicable to employees, the former official said on condition of anonymity.
The regulator has now given Axis Bank an opportunity to respond to its observations and explain the rationale behind the challenge. There have been instances where the RBI has accepted the reasoning provided by the regulated entities and withdrawn its observations, the former RBI official said.
Concerns about misleading sales
Experts said the RBI’s intervention raises the question of whether the regulator is concerned about the possibility of mis-selling or the structure of the rewards themselves.
“While the RBI does not typically interfere with 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 RV, partner at King Stubb & Kasiva, a law firm. “The nature of foreign and local trips as incentives could push employees to prioritise short-term sales goals over long-term customer interests, something the RBI seems keen to avoid.”
Others said greater regulatory scrutiny of misleading sales is essential to protect consumer interests and promote transparency in the financial sector.
“This move will help prevent deceptive practices and strengthen ethical standards. It is an important step towards rebuilding public trust in banking and will help curb unethical practices and ensure that banks prioritise fair treatment of customers,” said Rahul Sundaram, Partner, IndiaLaw LLP.
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