Is Dr KC Chakrabarty being hypocritical about consumer protection?

An RBI deputy governor explains with great clarity the customers’ problems and also the solutions, but prefers to remain passive

Not long ago, Reserve Bank of India (RBI) deputy governor Dr KC Chakarabarty, triggered widespread outrage, when he seemed to give a clean chit to the three banks caught in Cobrapost’s sting operation exposing their eager willingness to break all the rules to launder a fictitious politician’s black money. Dr Chakrabarty has the customer services portfolio and, under his dispensation, we have seen the RBI rapidly going from a pro-consumer regulator to a callous and indifferent one which refuses to engage with consumers.

RBI, under governor Dr YV Reddy had cleaned up the retail consumer segment after rampant mis-selling of credit cards and consumer loans (especially to vulnerable low-income groups) was followed by banks and financial service-providers letting loose goons with underworld connections to recover loans offered at usurious terms. The recovery tactics created a scandal because some borrowers, backed to a wall, were driven to suicide. The regulatory clean up and grievance redress system that followed was thorough and the mis-selling of financial products regulated by RBI came to a halt. However, what remains untouched is the rampant mis-selling by bank relationship managers who con their own customers and will bend or break any rule to meet performance targets.

At Moneylife, we have always attributed this rot to the RBI’s unwillingness to engage with customers leading to ignorance of core issues that affect consumers. To my utter surprise, I discover that RBI is fully aware of all the problems and what needs to be done. It is only unwilling to walk the talk and implement them! On 22nd March, in his inaugural address at a seminar in Pune on “Financial Consumer Protection”, Dr Chakrabarty delivered a speech of such dazzling clarity about consumer issues and their solutions that it has left me stupefied. Let me highlight what he said:

    The consumer, as depositor, saver, and borrower is not just another link in the chain, but the central actor in the marketplace and, is most impacted by the ill-effects of macro- and micro-economic problems that have gripped the financial sector.
    The presence of a credible and effective regulatory regime acts as a source of confidence and comfort in the financial system. The global financial crisis has shown that self-regulation, often, does not work and a strong, intrusive and hands-on regulator/ supervisor provides the confidence that markets will operate on sound principles and be free from unfair and unethical practices. This trust is the basis of a good financial system and any dent in the trust has a destabilising influence.
  Logically, competitive market forces ought to take care of consumer protection in the financial services sector, but this has not happened because of high entry barriers, especially in banking. Self-regulating behaviour also does not work for the poor and vulnerable segments because of ‘rampant information illiteracy’, making consumer protection a regulatory obligation.
  Ensuring that the financial service-providers treat their customers fairly helps. This means ensuring that products and services offered by financial institutions are suitable for the customers and appropriate to their risk profile; pricing is transparent and non-discriminatory; and the service is delivered in a speedy, safe and secure environment.
The global financial crisis was the result of financial innovation that was unsuited to consumer requirements; when combined with aggressive sales practices and perverse compensation systems, it led to mis-selling to. Hence, financial regulators must ensure that innovation is oriented to consumer needs. A documented ‘Treating Customers Fairly’ (TCF) policy would regulate the design and marketing of financial products and services, the system of information dissemination, facility for after-sales support and the grievance redress.
    A market intelligence mechanism should focus on identifying products which could expose consumers to unintended outcomes. Institutions must have their ears to the ground to get a feel and understanding of evolving trends and practices. This is necessary for commercial institutions, but is also a vital input for regulators in anticipating the build-up of risks in order to take proactive action.
    Although the entire financial services business revolves around the consumer, their voice is the feeblest and, very often, not heard. The inability to understand consumer needs is the genesis of all consumer protection issues. Strengthening the consumer voice in the financial regulatory system is not just in the interest of the consumer, but also for sustainability of the financial system.
    Openness to consumer needs and aspirations and a quick, just and efficient grievance redressal machinery is the key. The credibility of the banks’ redressal systems needs to be reinforced by constant follow up by the regulator.

Clearly, Dr Chakrabarty is fully cognizant of the problem—and the answer to consumer-related issues and mis-selling of financial products. Even minor disagreements that one may have (for instance, I believe that the inability to understand complex financial products that are made to appear safe, simple and risk-free is what prevents competition from working in the financial marketplace, rather than high entry barriers to service-providers) evaporate when one hears him say that regulators must take responsibility for product design and their sale must be suited to the investor’s risk profile. Even more heartening is the fact that the speech throws jargon like ‘information vulnerability’ and ‘information asymmetry’ but does not say that bombarding investors with information and disclosures is the solution.

The question then is: What stops RBI from walking this talk? When is the last time that RBI engaged with consumers or consumer groups? What is its market intelligence mechanism?  What has RBI done to prevent an army of bank relationship managers from systematically targeting vulnerable segments such as women and senior citizens? Doesn’t RBI know that banks sell unit-linked insurance products, mutual funds with exit restrictions, hybrid derivatives, bond funds and other instruments that carry high risks but are projected as being as safe and liquid as fixed deposits?

Far from protecting investors cheated by such tactics, the burden of proof has been transferred to the hapless victims of mis-selling. What has Dr Chakrabarty personally done to ensure that bank services committees, set up under Dr Reddy, hold mandatory quarterly meetings? While RBI has signalled that these are no longer relevant, Dr Chakrabarty spouted homilies such as “to err is human but from an institution’s point of view, to confess is divine. If an institution is in the wrong, why should it wait for the consumer to approach it for compensation? Would it not be righteous if the bank or financial institution on its own initiates actions to undo the wrong inflicted on customers, some of whom may have not even complained?”

Dr Chakrabarty’s clarity would have been a matter of joy for bank consumers if he had attempted to implement even a fraction of what he articulated. Instead, there is a sense of hubris, probably born out of a misplaced pat-on-the-back in the World Bank-IMF assessment report that the deputy governor chose to quote in the same speech. The report apparently put India ahead of most countries in terms of comprehensive policies and compliance mechanisms for the protection of banking consumers. Well, all we can say is that the World Bank-IMF assessment, benchmarked against more rapacious systems, may also have been written out of an ivory tower like RBI, without really talking to the consumer.

Sucheta Dalal is an award-winning journalist and the managing editor of Moneylife. She can be reached at [email protected]

Comments
nagesh kini
9 years ago
Dr.KCC says at the Yes Bank Seminar on Sustainability on 23/4 -

"Many times directives of the RBI do not work."

For once the Dy. Governor has gone on record to say this in public! We all knew this all along! What's new?

This is reported by the Hindu Business Line April 24 Money Banking p6.
anantha ramdas
9 years ago
Thanks for raising this subject on RBI, Ms Dalal. It would be nice if you can identify the email address that one can write to on general matters to RBI and then expect them to give a preliminary response, saying "your enquiry has been passed on to Mr so and so whose email address is x y z and he will respond to you directly". If no response is received in 3 working days, please contact Mr so and so, whose email adress is abc, and he will respond positively within 24 hours of your message.....

My experience with RBI is bad; if any other person has had a better luck, please let me know!
Ravindra
9 years ago
Dr. Chakravarti is very fond of opening his mouth on any topic on the Earth, most of the times with a wrong approach. How such persons get appointed on the serious positions like RBI Dy Governor?
nagesh kini
9 years ago
The Free Press Journal April 18,2013 Business page -
"Cobrapost expose:RBI detects systemic failure
"Last week Dy.Gov. HR Khan said that the central bank is initiating action against these banks."
Pray what will Dr.KCC have to say now?
Gopalakrishnan T V
9 years ago
Dr Chakrabarty is known for making some comments not befitting his position and the responsibilities. In the recent meeting of banks in Mangalore, he advised customers to demand service from employees without, however, realising that as it is same thing happens and customers fight in branch premises to get some attention and service. The employees manning the counters do not even show the courtesy to look at the customer's face and say hallo. With the implementation of KYC norms even the human touch once prevalent in banks has been missing and employees have a check list of documents to be demanded.With the invasion of technology, the need for human touch has been done way with and one has to only press some buttons to get the transactions done. Sometimes one gets a feeling that it is better not to deal with staff and get irritated and carry a bad feeling about staff. To that extent machines are far better than human beings.All said the customer service in banks has been deteriorating day by day with bad repercussions on Financial inclusion, deposit mobilisation, NPA accumulation,generation of black money in the society as KYC keeps away people from approaching banks etc. In this context the approach of the DG expecting customers to fight for service is not in good state and it only encourages staff to be more indifferent and casual as such an expression smacks of the regulator's incompetence to find a viable solution to improve the customer service.
R Balakrishnan
9 years ago
He represents the zamindar remnants of the Raj. They can never come down to earth. They think of the rest of us as 'silly Indians'. Why do we expect anything from this guy who is caught in a time warp?
nagesh kini
9 years ago
Absolutely YES.
He always speaks out of turn.
His response to the Cobrapost expose contradicts the RBI Governor's!
RBI does not even to acknowledge
receipt of stakeholders' submissions on Discussion Papers put out by them.
Dr. KCC needs to provide some lessons on common courtesy literacy to all departments more particularly the Corporate Communication with whom my email is already pending.
Puskal Upadhyay
9 years ago
Great, for saying it straight.This may not be the only regulator which knows all but falls short of practicing it...
M G WARRIER
9 years ago
Sucheta, thank you for the plainspeak. In the recent past, Chakrabarty is the only RBI Deputy Governor who has got away several times after making observations unsubstantiated by facts or controversial in the given context. There seems to be a concerted effort to destabilise Indian financial sector. If someone blames that the vested interests behind this effort are also behind piece-meal reforms measures and production of reports like ‘FSLRC Report’ or diverse debates on new bank licences, it would be difficult to contest. I for one, painfully see a ‘pick and choose’ approach in policy formulation and selection of recommendations to be acted upon.
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