Making Banks Accountable to Retail Customers

Since banks are the biggest distributors for all financial products, they need to operate within a strong consumer protection framework. This is lacking

The Reserve Bank of India (RBI) is, finally, working on a consumer protection framework that will empower it to ensure that banks treat their customers fairly. This is in line with global best practices that RBI deputy governor Dr KC Chakrabarty has been espousing for a long time. The crux of the new thinking is 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.”

In India, growing consumer complaints, media sting operations on banking practices, as well as RBI’s own observations based on inspection of banks, have repeatedly highlighted how they are willing to wink at the rules leading to the laundering of unaccounted money. At the same time, they happily sell toxic, third-party products to their own customers in violation of their fiduciary obligation to sell and recommend products appropriate to the customer’s needs and financial profile and after ensuring that she understands the risks involved.

Over the past year, RBI has repeatedly exhorted banks to treat customers fairly (TCF) through various public statements, meetings and circulars. But this is clearly not enough. While moral suasion may have worked in a closed economy, the freedom to fix charges and the formation of an informal pricing cartel through the Indian Bank’s Association (IBA) seems to have weakened RBI’s ability to compel good behaviour.

A voluntary code of adherence to customer services and the inadequate provisions of the Banking Ombudsman’s Act have also had little impact on critical issues such as pricing, mis-selling and grievance redress. A clear framework for customer services, empowering RBI to act against unfair practices, is the need of the hour, along with increased competition through new banks, so that banks, on their own, feel the pressure to treat their customers fairly.

RBI has already warned banks about the many practices that it considers unethical or unfair to customers. These include:

    Levying charges that are based on competition (or cartel) rather than costs for services. Levying charges when no service is provided (failure to maintain minimum balance, intersol charges, pre-payment penalty on loans, and cancellation of demand drafts) or where it is a security imperative (like text messages for transactions).

•  Mis-selling of third-party products (like insurance), collective investment products (like art funds) and mutual funds, through monetary incentives to bank employees. Bundling insurance with loans, term deposits and other deals to earn fees.

    Misuse of floating rate policies to increase spread when interest rates rise, but failing to pass on interest rate cuts with the same alacrity. Offering better rates to new customers and treating existing customer unfairly. Taking advantage of the festive buying to mislead customers with false claims of zero interest through deals with manufacturers.

    Helping customers to avoid the tax reporting requirements by providing multiple customer identity numbers, splitting fixed deposits and accepting cash.

While these specifics may be covered by RBI’s customer protection framework, the conceptual raison d’être for this is the realisation, worldwide, that weak consumer protection poses a significant risk to the wider economy and the financial sector cannot be trusted to self-regulate, even in its self-interest.

For RBI to align its own customer protection framework with the demands from consumers, it would do well to consider some key suggestions from bodies such as Consumers International (CI) which is a worldwide federation of consumer groups and represents 220 members across 115 countries. Moneylife Foundation, our sister entity, has recently become a supporter member of CI. Some of the suggestions are still to be accepted by central banks across the world, although some countries have made big strides in their implementation.

CI points out that half the world’s population is still unbanked. This is a real concern in India, which probably has the largest number of unbanked persons worldwide. Unfortunately, financial inclusion has only meant various gimmicks, including the push for unique-identity-based bank accounts for delivery of subsidies, without any clear thought about how to ensure genuine usage that is cost-effective.

Banks want to charge customers for ATM transactions beyond the fifth every month, because interchange costs and taxes amount to nearly Rs20 per transaction. Banks need to push customers into making fewer transactions for higher denominations, but there is no attempt to ensure this through awareness campaigns; instead, they are toying with restrictive costs. At the same time, there is a push for biometric-enabled ATMs in the name of financial inclusion, which is sure to involve only low denomination transactions. Unfortunately, there is no pressure on banks to work with consumers, or consumer groups, to come up with innovative solutions to these issues.

CI also points to the need for a national consumer protection body that covers multiple regulators. Such an independent body was also recommended by the Financial Sector Legislative Reforms Commission (FSLRC), but has met with quiet and determined resistance from India’s multiple independent financial regulators. Interestingly, Indian financial regulators, including RBI, have signed a memorandum of understanding (MOU) to monitor large conglomerates, but there is no such understanding or cooperation for consumer protection, although it is clear that sale of third-party products by banks has cheated financial consumer the most.

Some of the other issues flagged by CI for the protection of financial consumers:
1. Information Design and Disclosure: Consumers should receive clear, sufficient, reliable, comparable and timely information about financial service products. The pricing should be clear and allow consumers to appreciate costs before buying a product and information must be provided in standard formats. Failure to do so should make contracts void. Financial products must be tested for quality and comprehension by companies and audited by regulators. This is a clear shift away from disclosure-based regimes.

2. Contracts, Charges and Practices: Regulators should introduce a requirement of comprehensibility and prohibit products that are not comprehensible to ordinary consumers without expert knowledge. Conflict of interest in the provision of advice and sale of financial services needs to be addressed. Financial advice to consumers should be separated from sales-based remuneration. And contracts with consumers should be void-able, if they fail to get informed consent of the consumer, charge unfair or unreasonable fees,  or are contracts designed to ensure a waiver of basic consumer protection and sale of inappropriate products, based on the consumer’s profile.

3. Redress and Dispute Resolution Systems: Ensure that consumers have access to adequate redress mechanisms that are ‘expeditious, fair, inexpensive and accessible’.  
While India surely needs to look at the global debate on this issue, it needs to formulate a policy that works best for India, taking into account our own socio-economic milieu. A strong national consumer protection body, as recommended by the FSLRC in India or Consumers International overseas, may not be immediately feasible in India. Instead, since banks remain the big and trusted source for selling a host of financial products, including wealth management and advisory services, a strong consumer protection framework under RBI is an immediate imperative.

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]

Ramesh Jaradhara
1 decade ago
Banks accountability to retail customers is an urgent requirement.Banks now selling third party insurance products mostly against the wish of customers because these are packed with loan products.Customers are bound to buy these products otherwise they cannot avail credit facility from banks.The third party insurance products are mostly not suitable for customers. A strong consumer protection body is the need of the hour.
Gopalakrishnan T V
1 decade ago
A very comprehensive article and has captured well the problems faced by the customers of banks despite sufficient awareness creation and regulation by the RBI.The change of mindset at banks particularly PSU banks is yet to be felt by the customers. The very approach to customers by the Counter clerks is to wean away the customers with some silly excuses in the name of KYC.Even if they are deposit customers, the staff are happy to send them away fast and get rid of the customers and their deposits. Now banks entering into broking business as envisaged by the authorities, the customers will have more problems and they will be harassed to pick up insurance products against their wish and conveniences.In this regard, I am reminded of the famous Cartoon by Mr Laksmanan of TOI during the Harshat Mehta Scam in 1992 that bankers became brokers and brokers became bankers. If banks are forced to do broking they will neither be brokers nor bankers but will be the killers of customers.The only way to improve Customer Service in our banks is to introduce Customer Service Ratio in banks akin to Capital adequacy ratio and this should be the benchmark in rating the bankers by RBI, Public, Government etc. No amount of counseling will work with our bankers.Public Vigilance is a must and this is possible only through a Customer Service Ratio built up through a meticulously and scientifically developed model.
Narayanaswami Natarajan
1 decade ago
Can you also kindly take up with RBI and banks why they are not giving housing loans to senior citizens, even if highly cashable debt securities are pledged with plenty of margin. This is unfair. One can understand bank's anxiety to cover themselves against death of the borrower. But when sufficient security is submitted along with proof of earning capacity, they have no justification. as a sr. citizen, I want to buy a senior citizens home, but no bank is willing to give me housing loan.
n. natarajan
Jagdish Motwani
1 decade ago
Wonder how Finance Ministry / Regulators, are encouraging Banks in general specially PSU Banks in particular for Selling Third Party Insurance Products

1) When this Banks are unable to meet the service standards for their banking operations due to staff shortage how additional workload of selling & servicing insurance policies, claims, etc. can be achieving without compromising servicing standards & generally to the disadvantage of consumers.
2) Whether any Data / Details is collected by Banks / Finance Ministry about the level of Commission / Brokerage earned by Banks v/s Total Expenses Incurred from their insurance business activities. Apart from this has there been any study / availability of details about increase in banks’ NPAs’ due to Borrowers’ Defaults arising out of Rejection of Insurance Claims due to Loss / Damage of Insured Collateral / Asset arranged by banks. It is regular practice of the banks to give borrower with deficient insurance covers of mortgaged properties, etc.
3) Recently RBI Governor had expressed that RBI is not in favour of Banks’ selling Third Party Products like Insurance, Mutual Funds, etc. Despite this IRDA has proposed for relaxed rules for offering Broking Licenses to Banks to sell Insurance Products of multiple insurers.
4) After opening up of insurance industry last decade there was rampant miss-selling of insurance policies specially ULIP plans & it was only when SEBI intervened to control ULIPs, the IRDA initiated some action for damage control. Despite this regulator IRDA has been soft on miss-selling looking at the numerous complaints appearing in media from time to time. In this regard there were serious media reports about banks converting unaccounted money into white money through insurance policies & no details are known about action taken by IRDA/FM against guilty insurers & banks (as corporate agents).
5) Insurers have been marketing their policies through Banks. etc. & the persons / employees involved in soliciting these policies are neither qualified nor trained about the Insurance they sell. Despite IRDA’s strict rules of IRDA for mandatory training & exams of insurance sellers like Individual Agents or Designated Employees of Corporate Agents as Brokers, the regular untrained & non dedicated staff (some times even that being not on roll but through outsourced HR Agency) are freely soliciting &selling the Insurance policies for banks / insurers. Is each bank’s branch which has counter / facility to sell insurance manned by full time dedicated & qualified staff?
6) Whether Banks’ forced selling of insurance (by arbitrarily debiting the account with insurance premium) is in line with Consumer (borrowers’) Rights. Has Finance Ministry considered about referring this practice to Competition Commission of India (CCI). IRDA had issued “Discussion Paper dated 02/02/2012 - On Tying & Bundling of Insurance policies with Goods & services” but further details are known about action taken by IRDA to prevent malpractices in such Cross-Selling.
7) IRDA has capped the Remuneration of agents & brokers for various types of policies. However over & above such limits the insurers’ pay additional amounts to Banks’ & it’s associates as marketing or administrative expenses, etc. Has Finance Ministry / RBI collected any data / details about the amount of all money (in the form of commission + any fees + any reimbursement, benefits etc,) received by Banks from insurer’s & their associate companies.
1 decade ago
3rd party products are sold, not for the benefit of customers, but because they are profitable for the banks. Thus, it is difficult for bank customers to win this battle for survival.

Mis-selling by bank employees can stop only if:

1)Revenue from 3rd party products are not given weightage during performance reviews /appraisals of employees

2)Furthr, no giving rewards and recognition for selling 3rd party products.

Easier said than done . . . when bonuses, ESOPs, EPS & Market Cap. are at stake.
nagesh kini
1 decade ago
Great well researched article Sucheta!
I still maintain that our commercial banks have no business to go beyond their age old mandated core banking activity of accepting deposits and making of safe advances and putting their manpower to effectively recover the monies lent out.
Instead of doing the latter, today in the name of rendering they are seen to be venturing into all kinds of non banking services through "financial malls" by induldging in unbridled sales of all kinds of toxic third party products like insurances of all kinds, mutual fund instruments,art funds, gold and god only know what will come next!
The bank staff at all levels are utterly incompetent as they are not trained or geared for dealing in thse products, they totally lack the knowhow and technical expertise in how to render after sales services in the case of insurance in lodging of claims and following them up through to ultimate settlement, or obtain redemption of MF products - all this is passed on to their ubiquitous 'back office' an anonymous impersonal entity without any interface with customer relations.
RBI's "TCF" is indeed a great concept on paper. It seems to be more like "KYC" that has turned out to be "Kill/kick Your Customer"!
I eagerly look forward to achievements of TCF that it has run over the last year since it was intrduced.
1 decade ago
1 decade ago
This is a timely well researched analytical article by Sucheta Dalal.
RBI now should give top priority in making strict regulatory rules to protect the interest of the consumers.
I would like to add one important area where the protection by way of regulatory direction is immediately required and that is a fraudulent transaction done ONLINE by a customer thru' Credit Card. When it is immediately informed to the credit card issuing bank, the bank must FREEZE that payment till the disputed transaction is investigated and resolved.Presently the card issuing bank expresses its inability to do this but to automatically honour the payment to Merchant banker/ establishment account whether claimed by them or not. They argue, their Inter-bank transaction agreement provides so. This clearly goes against the interest of the retail bank consumers.This MUST GET CURBED BY THE REGULATOR.
1 decade ago
I am working on developing standards for activities of consumer clubs' in academic institutions in India - schools, colleges, and universities. I would like to know how best Moneylife could help in developing contents for different level of c-clubs activities
In fact, my organisation, Binty, has been working jointly with BOs to spread awareness on banking services but do not find it very communicating. Please advise how to go about.
nagesh kini
Replied to gcmbinty comment 1 decade ago
Do let me know your contact email.May be I can possibly help you in developing contents for your consumer clubs.
Vaibhav Dhoka
1 decade ago
What is cost for bank for collection of cheque.Bank charges account-holder for cheques returned unpaid.What is logic in this practice.In some instances Bank of Maharashtra has levied Rs 6 as transaction charges when asked to explain manager and staff member pass buck.For such petty amount one cannot put his energy on such issue.But cheque return charges must be discussed through this forum.
Replied to Vaibhav Dhoka comment 1 decade ago
Private Banks Charge Rs,500 (appr.)for Cheques Returned .All FIs Collect Cheques in advance for EMIs on their Loans and if any dispute arises on this Issue and Consumer does not like to Pay furthur ,FIs including Banks simply present cheques for collection and Banks Charge heavily for Cheques returned charges , I am charged Rs,3000 in 3 months by HDFC Bank and I have closed my Account with them to avoid these Charges.Thus RBIs Control to Pull up Banks is a must.Money Life only can do it.
Vaibhav Dhoka
1 decade ago
What is cost for bank for collection of cheque.Bank charges account-holder for cheques returned unpaid.What is logic in this practice.In some instances Bank of Maharashtra has levied Rs 6 as transaction charges when asked to explain manager and staff member pass buck.For such petty amount one cannot put his energy on such issue.But cheque return charges must be discussed through this forum.
Vaibhav Dhoka
1 decade ago
What is cost for bank for collection of cheque.Bank charges account-holder for cheques returned unpaid.What is logic in this practice.In some instances Bank of Maharashtra has levied Rs 6 as transaction charges when asked to explain manager and staff member pass buck.For such petty amount one cannot put his energy on such issue.But cheque return charges must be discussed through this forum.
Vaibhav Dhoka
1 decade ago
What is cost for bank for collection of cheque.Bank charges account-holder for cheques returned unpaid.What is logic in this practice.In some instances Bank of Maharashtra has levied Rs 6 as transaction charges when asked to explain manager and staff member pass buck.For such petty amount one cannot put his energy on such issue.But cheque return charges must be discussed through this forum.
1 decade ago
What can be worse than this? In Master Circular on Credit Card Operations of banks ( the bank-friendly and consumer-unfriendly RBI says "1. (e) Termination / revocation of card membership
i) Procedure for surrender of card by card holder - due notice". This means that only the card-holding customer has to give notice for surrender and the bank need not give notice for termination. So, cleverly worded. My e-mail to RBI to rectify this has not been responded.
MG Warrier
1 decade ago
A well researched analysis.
The costing and pricing of products followed in financial sector is not different from those followed by MNCs for most of the consumer products including life-saving drugs.Always, profit from every transaction is the objective. What banks often forget is, their resources come from the clientele-public- they offer to serve.
In response to a recent media report which said “SBI says ATM operations in losses, supports idea charging customers ”(January 13) and a related report which spoke about “RBI to examine proposal for limiting free ATM transactions”, I had responded:
“ It is common knowledge that banks discourage account-holders who enter banks’ premises to withdraw small amounts of cash(upto the limits allowed for ATM withdrawals- Rs15 to 20 thousand per day). The costing methodology for arriving at profit/losses in ATM maintenance should factor in inter alia (a) the low interest paid on Savings Bank accounts from which ATM withdrawals are made and (b) the savings in costs- man-hours, stationery etc- when transactions are managed through machines.
Another aspect Reserve Bank of India and banks should look into is the need for several ATMs in the same locality or sometimes in the same shopping area, maintained by different banks. As the present infrastructure and technology for ATMs do not leave much scope for ‘competition’ among service providers, pooling of resources and having ATMs based on need could be thought of. Where ATMs are working within short distances, say 100 meters or so, bringing them together under one shelter will save costs on rentals and security.”
The Indian managers are used to obeying super-imposed regulation and the day ‘self-regulation’ will work is far off. When government/s and regulatory bodies are not able to think and work on same wave length, the situation is taken advantage of by vested interests.

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