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Rooting for Right Regulation

Dr Raghuram Rajan fittingly took aim at the FSLRC’s ideas on unified regulation. Bank customers hope his rhetoric translates into a push by the RBI to do much more for them

Central bankers are supposed to be obtuse in their speech. Alan Greenspan, the long-serving former chairman of the US Federal Reserve, is quoted to have said, “Since becoming a central banker, I have learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said.”

But there was no room for misunderstanding in the brutal plain-speak with which governor of the Reserve Bank of India (RBI), Dr Raghuram Rajan, demolished the key recommendations of the Financial Sector Legislative Reforms Commission (FSLRC). In what is probably one of the bluntest speeches by any Indian regulator or policy-maker, Dr Rajan opened the doors to a no-holds-barred discussion on financial sector regulation, policy-making and consumer protection. Here are some key issues that he raised.

“If it ain’t broke, don’t fix it,” he said, opposing FSLRC’s logic of merging all regulators under a unified financial agency. No single regulatory architecture had emerged unscathed from the global financial crisis, he said. Instead, “different regulatory architectures have succeeded or failed based on the circumstances of the country and the quality of the regulator.”

He found FSLRC’s recommendations on the appropriate size and scope of regulators ‘somewhat schizophrenic’. He said, “There is no discussion of the synergies gained or synergies lost” in bringing all regulators together under one entity, making the “recommendations seem faddish and impressionistic rather than based on deep analysis.”

Excessive legal oversight and permitting all decisions to be appealed before the Financial Sector Appellate Tribunal could paralyse decision-making and reduce the regulator to a paper tiger.

There was a need to frame regulatory architecture taking into account the multiplicity of roles and functions of regulators.

Of interest to Moneylife readers is Dr Rajan’s admission that FSLRC’s recommendation on effective consumer protection laws had pushed RBI to focus on the issue. We have seen several pro-consumer decisions in the past few months and RBI has also drafted an excellent consumer rights charter. But that is the easy part.

Unless the charter is backed by time-bound decisions on consumer complaints and stringent penalties, it will be yet another righteous, but meaningless, piece of paper, like the BCSBI (Banking Codes & Standards Board of India) code that banks agree to adhere to.
Explaining his worry about excessive regulation,

Dr Rajan gave this example of the class action element in arriving at a decision. “A bank may attract a lot of complaints from its credit card customers. While no single customer may think the case worth taking to court, and while no customer may be able to prove the bank was in the wrong, the large number of complaints will suggest to the regulator that the bank needs to shape up,” he said.

The regulator can gauge if something is wrong by comparing the nature of the complaints it gets from this bank’s customers with those of other’s. Similarly, “if a particular product attracts a lot more complaints than other products, the regulator can ask the industry to modify the product appropriately, or even ban it,” if it is considered risky to the system. If such decisions are open to appeal, it would lead to distortions, he argued.

One agrees with everything that Dr Rajan says. Especially, since he went on to say that a regulator must earn trust by displaying “the greatest competence and integrity.” We also agree that RBI has ‘maintained a reputation for integrity’, despite the ‘general deterioration in the probity of public institutions’.

But we have an issue over his assertion about RBI’s analysis of complaints to arrive at decisions and internal cooperation between departments. Over the years, Moneylife, as a pro-consumer entity, has noticed that it requires persistent efforts and loud media reports to secure action against even the most brazen exploitation of financial consumers. Not because of RBI’s proactive analysis of complaints. The Banking Ombudsman Act (BOA) was amended to include credit cards only after an avalanche of complaints and mis-selling prior to 2008. The mis-selling of third-party products remains unchecked even today, despite thousands of complaints and gross breach of trust by banks’ relationship managers. This remains outside the purview of the BOA.

In fact, insiders have, often, admitted that, in the absence of a clear consumer protection framework, RBI feared it would be defied or dragged into litigation, especially by foreign banks. While RBI has, indeed, pressured some banks to settle an occasional case of gross abuse, there is no penalty, punishment or payment of interest, cost and damages. Thousands of complaints are ignored because neither the victims nor resource-strapped NGOs can afford to fight long and hard battles against powerful banks and cannot get RBI to intervene every time. It remains to be seen if this will be effectively remedied.

Secondly, on FSLRC’s ‘idealistic view of the benefits of reorganisation’ to create synergies and regulatory uniformity, Dr Rajan argued that “silos within a large bureaucratic regulator may prevent synergies from being exploited” while frequent inter-regulatory meetings could work. He said he got together with the SEBI chairman once a month to sort out issues. This again, is correct in theory, but surely Dr Rajan knows that the High Level Coordination Committee (HLCC) of regulators has failed.

The HLCC brings all financial regulators and the finance ministry to the same table, with RBI as the convener. Yet, it neither prevented an unseemly turf war between SEBI and the insurance regulator, nor led to uniformity in rules governing the advertising and promotion of financial products, nor did it prevented mis-selling of insurance and mutual fund products by bankers. On the contrary, his predecessors tacitly supported this by their silence over the high-cost or toxic products hard-sold by bankers who are incentivised to do this, and are often in a position to arm-twist borrowers.  

Thirdly, Dr Rajan needs to examine how silos within the large and bureaucratic RBI are preventing synergies from being exploited. Moneylife Foundation had submitted a memorandum to RBI with regard to credit bureaus. After a one-day credit camp, we discovered that credit histories were not being shared between the four credit information companies (CICs) licensed by RBI. Consequently, credit reports obtained from the newer CICs were incomplete and even inaccurate. Also, poor systems for correcting discrepancies in credit records caused harassment which had to be fixed by paying unregulated ‘debt doctors’. RBI’s customer services department, although sympathetic, could do nothing about it, because the regulation of CICs was under a different deputy governor and each guarded his turf zealously.

While it is true that this problem won’t be fixed by bundling all financial regulators under one roof, we hope that Dr Rajan will order an internal review to ensure that various consumer-related departments within RBI will act cohesively. It would also be a good idea to implement the Cabinet secretary’s note of 5th June, which asks all financial regulators and banks to cut bureaucracy, scrap redundant rules and regulations, reduce decision-making to four layers and ensure that departments collaborate to improve the speed of decision-making. RBI is known for its slow decisions, mainly because senior officials are forever travelling and there are turf issues between departments. The very existence of large and expensive entities like BCSBI and CAFRAL (Centre for Advanced Financial Research and Learning), which are only seen as sinecures for retired bankers, also need to be re-examined, since they operate like clubs with selective customer interface.

Dr Rajan, some internal blunt talk and action will reassure financial consumers that they are soon going to have a system that is just and fair.

Sucheta Dalal is the managing editor of Moneylife. She was awarded the Padma Shri in 2006 for her outstanding contribution to journalism. She can be reached at [email protected]



Dayananda Kamath k

2 years ago

if the regulators do their duties tru to the spirit of regulation and exchange information between themselves and act in the principal of public good there is no need of unification of regulators. because each regulator has his specific area and specializations. a simple example how the regulators failed is third party gold imports by nominated agencies continued for almost 5 years. and declared a violation by rbi circular and also obtained data from 96 branches but no action tasken against the bankers. nor matter referred to enforcement directorate. this even after questioning under rti. you have only right to information but not the right information.


2 years ago

Out of the box suggestions from Sucheta Dalal with an incisive analysis as to how deliverance can be strengthened for Consumers from financial regulators(albeit it must be applied to all other Regulators too). I have a good case arising out of the lacustrine or primitive Banking Ombudsman scheme, mired in age old methodologies in dealing with serious complaints of violations of RBI guidelies by Banks. Since presently the case is under Appeal to DY. Governor, I would wait for the outcome before I throw further light on how the Banking Ombudsman fails to safeguard the implementation of RBI norms from Banks.

A Vasudevan

2 years ago

This is a good piece worth reading by every banker and surely by RBI officers in active service. I have one small suggestion to make. There could be implementation committees in each bank and in RBI and these committees could meet once a week in their own organizations providing inputs to either ED or DG in charge of operations about the implementation problems and successes and also suggest areas of inter-organizational coordination. I am not sure whether Ms Dalal would like to reflect over this idea (which in fact is in operation in the Central Bank of Nigeria) and if possible give some orientation to it to suit Indian circumstances.
A Vasudevan
Former ED, RBI

Gopalakrishnan T V

2 years ago

A very well brought out message to RBI. The role of Ombudsman and BCSBI need to be examined in detail and there is ample scope for some synergies to be evolved.The Customer Service Department can play a key role in ensuring that banks are able to render complaints free service and like capital adequacy ratio, banks should be rated for their Customer Servive efficiency.The functioning of Local Boards of RBI also needs a thorugh review as it can do a lot in coordinating and guiding the banks ,NBFCs, NABARD, Cooperative Banks and RRBs in their efforts to achieve Financial inclusion, improved credit to agricultural and rural segment and complaint free services. Local Boards can also be made for effective in Coordinating the actvities of NABARD,, State level Agencies in enhancing agriculttural production, storage, transportation and Distribution to better the supply position of food items to bring down inflation.

Moneylife Foundation, Samir Zaveri Railway Helpline and CSRT urge PM Modi to rollback hike in season ticket fares

PM Narendra Modi should urgently consider a significant roll back in rail fare hike, especially the over 150% hike in monthly season ticket or pass, says the letter sent by Moneylife Foundation, Samir Zaveri Railway Helpline and Coalition for Safe Rail Travel

Moneylife Foundation, the Samir Zaveri Railway Helpline and the Coalition for Safe Rail Travel urged Prime Minister Narendra Modi to roll back the highly unreasonable hike in suburban train fares and season tickets (monthly pass).

Sucheta Dalal, Founder-Trustee of Moneylife Foundation, in a letter sent to the PM, said, "While we support the need for taking tough decisions and understand that a lot of corrective measures are required to bring the economy back on track, I am sure you will agree that a 100%-153% hike is unfair and hard to deal with when inflation is also very high. The fare hike will cause enormous hardship to over 75 lakh Mumbaikars, for whom the suburban railway network is a lifeline."

"Sir, I would like to add that the cost of a railway monthly pass is not the only daily commuting expense for most Mumbaikars. A large section of people have to spend on buses or auto-rickshaws to reach their homes or offices even after getting off from trains. Auto fares are also due to be hiked even though there is no effort in the past decades to provide decent connectivity from train stations."   

"It is hard to believe that this extraordinary hike has been done with full thought and understanding of the Mumbai situation. We urge you to consider a significant roll back urgently," Ms Dalal said in the letter sent on behalf of over 30,100 members of Moneylife Foundation and thousands of railway activists and daily commuters from Mumbai.

Her letter added that, "We have a lot of expectations from your government and urge you to re-consider such a drastic step. There are other revenue options available. Ever since the 1990s, there have been many suggestions to raise funds through the exploitation of valuable space at the railway stations. This would be an opportunity to modernise stations and also provide commuter facilities such as restaurants, shopping and even decent paid toilets. None of this has happened -- instead illegal hawkers crowd run-down over-bridges while corrupt railway officials and police collect bribes."

"We don't even have ambulances and proper medical facilities for the 25 odd people who meet with railway accidents everyday. Another avenue to raise funds would be to create paid parking towers near stations, at least in the distant suburbs, to provide better connectivity.  Surely, these ideas can be revived to raise funds to make life easier for the Mumbai commuter, rather than burden them further with higher fares. We would be happy to provide any cooperation that is sought from our groups," the letter noted.

Last week, Indian Railways decided to hike passenger fares by 14.2% and freight rates by 6.5% from 25th June. Second Class monthly season ticket (MST) fares of suburban and non-suburban would be charged on the basis of 30 single journeys instead of approximately 15 single journeys.  Fares of First Class monthly season tickets will be charged at four times the Second Class MST fares as is done presently. Revised fare are also applicable as per the existing method of computation on quarterly season tickets (QST), half yearly season tickets (HST) and yearly season tickets (YST), the Railway Ministry had said in the release.



TS Rao

2 years ago

I fully agree. If the daily commutation costs are subsidised then the overall cost of production would decrease and inversely if they are raised, naturally the production costs would escalate. So the authorities may like to reconsider the hike imposed.


2 years ago

Dear Madame, I have read many editorials asking to roll back fare hikes and raise money in other ways. But no one is saying about reduction of salaries(70% of total income) which are way high for any organisation like railways. Ideally it should not cross 50%. Also we have excess people working in railways.

And everyone asks about high speed rails, international amenities and safety. Still rail fares are lot cheaper if we consider bus fares.

Suiketu Shah

2 years ago

Root problem is the damage done in last 10 yrs due to EVM fraud that such harsh measures are required to be taken by respected PM Mr Modi.It is very harsh and painful but he is just about starting to erase the wrongdoings of the last 10 yrs which was due to EVM fraud.if it wasnot for EVM fraud BJP would have been ruling India for 15 plus yrs and India would have been a far far far better place in the last 10 yrs than what has happened.



In Reply to Suiketu Shah 2 years ago

Root problem is the damage done by the "Recount Minister"

Suiketu Shah

In Reply to Dev 2 years ago

hahahaha great joke on a hectic tuesday to start off mate:)))))))))))))))))))
Thanks ,agree 100%.


2 years ago

There is no doubt our suburban railways need considerable improvements and this means costs.I would feel rather than put a heavy burden on railway pass holders who are compelled to stay far away from their workplace the railway ministry could consider monetizing the assets all along the rail lines. Churchgate to Virar and CST to Kalyan offer tremendous value opportunities by building above & along the 40 or 50 railway stations. This could be restaurants, shops, malls, supermarkets etc. You should be able to generate several crores by way of monthly rents and also ensure cleaner stations with innovative plans and designs. There is almost 100km of distance between the 2 main rail lines of Mumbai.

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