RBI has done more for customers than Sebi and IRDA but it has also often argued that it will not interfere when it comes to products that already have an independent regulator. This is unfair to customers who repose enormous trust in banks

The true measure of a financial regulator’s success ought to be what it does to win the trust of its largest stakeholders—the consumers of financial services. What do these stakeholders usually want? Well, safety of transactions, appropriate regulation and supervision, swift action against wrongdoers and refund of their money through disgorgement of ill-gotten profits. How do our financial regulators measure up to this standard? In our assessment, the Reserve Bank of India (RBI) is a relatively more receptive regulator in the financial sector. And, while we may want it to act faster and to do a lot more, it moves in the right direction most of the time. Consider this:

•    On 3rd September, RBI issued a circular to end the pernicious 80:20 loans provided by banks to builders. This had allowed builders to obtain financing for projects under the guise of loans sanctioned to individual purchaser. We know that builders have been paying hefty commissions to brokers to obtain such bookings and many investors were mere fronts. This dubious funding, in collusion with banks, ensured that property prices remained artificially high, because there was no pressure on builders to lower prices. Moreover, the risk of bad loans was entirely that of the banks and investors. Ending these loans has also led to signs that artificially high property prices are likely to crack.

•    On 17th September, RBI put an end to the practice of duping customers through zero-interest loans, especially during the festive season. Banks negotiate and retain hefty discounts from manufacturers, while customers are offered zero-interest loans split into equated monthly instalments (EMIs). Similarly, banks did not pass on to the customers the benefit of moratorium on payment for certain products. A determined RBI stood firm even when banks got consumer durables companies to plead their case through the retailers’ lobby.

•    In the same 17th September circular, RBI has categorically told banks that merchant establishments cannot levy a fee on debit card transactions. This is a dubious practice, since, unlike credit cards, debit card payments are instantly deducted from customers’ accounts and ought to be transmitted to merchant establishments immediately. RBI has said that banks must ensure that they terminate the relationship with entities that charge fees.

•  RBI has also made it clear to banks that, in cases of electronic and online transactions, the onus of proving that the customer has been negligent has to be on the bank. At a recent meeting with nodal officers of all banks, Dr KC Chakrabarty, deputy governor RBI, was emphatic that banks must treat this as an institutional risk and get themselves insurance cover, if necessary, for possible losses. They cannot penalise the customer without proof of deliberate and wilful negligence. Some bankers responded with the claim that no insurer is offering such a cover; Dr Chakrabarty retorted: “Well, in that case, nobody is compelling you to offer Internet banking.” As a further check, all electronic transactions systems are supposed to allow customers to protect themselves by manually creating their own limits for such transactions.

•    The same was the case with ATM transactions. Already, RBI requires complaints to be resolved within seven days and the money credited back to the account, failing which the customer is entitled to a compensation of Rs100 per day of delay. Banks often benefit from the fact that customers are unaware of the rules. Here, again, RBI told banks that it was up to them to reduce their risks by placing limits on each withdrawal.

•    Dr Chakrabarty also had some words of wisdom for banks on the interest rate front. He observed that no bank was offering higher interest on savings accounts even though interest on term deposits had shot up to 9%. “You will not be able to stand the scrutiny when interest rates change,” he warned. Clearly, he anticipates that when interest rates finally drop, banks will be in a hurry to cut interest rates on all deposits, as they did in 2003. Banks probably expect to get away with this because the consumer movement in India is weak and there isn’t enough pressure on banks to be fair to consumers.

•    The Indian consumer is fortunate that some central bank officials stand up to the finance ministry as well. The latest example is P Chidambaram’s strange idea of providing more capital to banks to enable them to “lend to borrowers in selected sectors such as two-wheelers, consumer durables, etc, at lower rates in order to stimulate demand.” RBI has been quick to point out that this would only create bad loans if interest rates go up further.  

All these examples raise an obvious question: If RBI is so willing to bat for the consumer, why do we still have so many customer complaints? This happens for two reasons. Like other regulators, RBI also has no direct interaction with consumers. It only reacts when the number of consumer complaints to the banking ombudsmen, or through media reports, is large enough to draw the attention of its top brass. Moneylife Foundation, our not-for-profit initiative, has, however, found that when consumers’ voice is conveyed through a detailed memorandum, it is often heard and acted upon—albeit slowly.

Two important issues continue to be work-in-progress. First, the absence of a clear grip on technology costs and the robustness of technology systems. Customers are discovering, to their horror, that even the banking ombudsman fails to understand the implications of tiny errors in the calculation of interest rates or deductions or system-induced mistakes in email identities, registration of nominations, etc. All these will have more serious implications when bank accounts are only based on UID numbers which are often flawed.  

The second serious issue is the brazen mis-selling of mutual funds, insurance and wealth advisory services through banks. RBI has often argued that it will not interfere when it comes to products that already have an independent regulator. We believe this is unfair to customers who repose enormous trust in banks and there is, thus, a serious breach of fiduciary responsibility. Strangely, although RBI was considered the first-among-equals at the high-level coordination committee of regulators, it refused to show appropriate leadership with regard to consumer issues. The finance ministry is too focused on defending itself and the government on a series of bad decisions and scam charges (coal, telecom, steel mining, gas pricing, aviation purchases, among others) to worry about individual investors being cheated. Consequently, the insurance regulator and the capital market watchdog are accountable to nobody and turn a blind eye even to outrageous cases of cheating. Moneylife Foundation has helped 25 victims of AB Capital, a corporate agent of Reliance Insurance, to recover nearly Rs14 lakh collected as premium on the promise that they would get a zero-interest loan that was 10 times the insurance premium. AB Capital probably has thousands of victims and it agents continue to dupe people even today. The regulator has made no effort to stop this. After all, the problems of a few million middle-class Indians is not a priority for the government or the parliament and, therefore, that of the regulators.

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]