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]