About the worst experiences, we have as consumers, are with banks and financial services. False promises in equity and insurance investment schemes, harmful outcomes from traditional insurance products and getting locked into products you cannot get out of, are routine, as is mis-selling by agents and distributors.
The reasons for such horrible experiences are two-fold. One, most of these are non-standard products or services. For a bar of soap, production and benefit features can be standardised; so all bars will do the job of cleaning. Not so for financial services, where some products will work for some customers and will not work for others, especially when it comes to market-linked products.
The second reason is poor regulatory enforcement, especially for banking and insurance services. The Reserve Bank of India’s (RBI's) regulatory philosophy is to issue guidelines and create a process of grievance redress. It is not too interested in finding out how these guidelines and processes work on the ground.
Consider the following:
Indiscriminate Freezing of Accounts
Banks are quick to freeze savings and current accounts without proper warning and notice, merely for a delay in updating know-your-customer (KYC). On paper, RBI requires at least three notices to customers before initiating any coercive action. Yet, in innumerable cases, including the freezing of my accounts, the bank was sloppy about sending out notices. Even though account freezing causes enormous harassment and embarrassment, there is zero accountability or punishment for banks that have not followed the rules.
India boasts of being a tech superpower. Our payment systems are the envy of the world. Banks are using technology to target customers with third-party products. And yet, RBI is shy of checking the digital footprint of KYC updation notices sent to customers that ought to be available with each bank.
A centralised process under core banking generates notices which are then expected to be sent out by the branch.
In my case, while notices were generated at the centralised level, the branch did not bother to send them. Banks are not asked to produce proof of having sent email/SMS notices to update KYC before freezing accounts and depriving people of their own hard-earned money entrusted to the bank.
Nobody is held accountable for lapses, doesn’t matter how badly it affects the person or business whose accounts are frozen, nor is there compensation for losses. Most people get to know their accounts are blocked only when a cheque is bounced.
Lost or Misplaced Documents
Moneylife Foundation has come across many cases where banks and finance companies cause permanent damage to the value of properties by losing all or part of the chain of documents kept in their custody against loans. These include business loans as well as home loans.
If the chain of property documents is not complete, the loss of value is permanent. Other banks also do not accept such defective documentation while granting loans. Yet, the bank or finance company responsible for causing the loss simply is not asked to compensate customers, even when they admit that it is their fault.
Often, banks simply do not admit any fault. We know of one customer who was asked to go to the bank’s warehouse where documents were stored and hunt for the papers himself.
In another case, a top bank is unable to complete the police procedure required to obtain a certified true copy and complete the chain of documents. Meanwhile, this customer is unable to sell his property.
Once again, how hard is it for RBI to issue standard operating procedures (SOP) on how to deal with lost/ misplaced documents, that cover all eventualities including compensation to victims?
Nomination and Transmission Issues
The absence of SOPs is acutely felt in the area of nomination and transmission, where each bank, finance company and even individual branch makes up its own rule. RBI’s circular says that banks need to take necessary precautions while transferring account proceeds of deceased customers to their nominees, but cannot make superfluous and unwarranted demands such as seeking bonds, indemnities and sureties from nominees; this continues to be ignored.
RBI has recently asked banks to sign stamp paper agreements with customers for opening bank lockers. In the absence of SOPs, there is no standardisation on the value of stamp paper either. Clear guidelines need to be issued and it should be mandatory to provide customers with a copy of the agreement. In a digital world, it should be very simple to make a scanned copy available and also keep it on the customers' records for easy access.
How To Fix This?
It is easy to eliminate this hardship inflicted on consumers if our regulators change their regulatory philosophy. The current attitude of RBI is benign and distant. RBI issues edicts and rules, but does not bother to check how it impacts customers.
What is needed are two simple steps. As far as possible, issue SOPs for all aspects of banking operations so that there is no scope for banks and especially branch officials to interpret them, impose conditions or arm-twist customers, to meet sales targets. Second, initiate punitive action and compensation to customers when the bank is at fault. If banks as well as bank officials are personally liable for steep fines and damages, they will automatically exercise due care.
Unfortunately, as I mentioned in my previous column on public liability
, for some strange reason all adjudicating authorities (regulators, tribunals and courts) in India are extremely coy about imposing punitive damages. In the absence of punitive damages, there will be no serious improvement in customer service.
(This article first appeared in Business Standard newspaper)