Dr Raghuram Rajan fittingly took aim at the FSLRC’s ideas on unified regulation. Bank customers hope his rhetoric translates into a push by the RBI to do much more for them

Central bankers are supposed to be obtuse in their speech. Alan Greenspan, the long-serving former chairman of the US Federal Reserve, is quoted to have said, “Since becoming a central banker, I have learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said.”

But there was no room for misunderstanding in the brutal plain-speak with which governor of the Reserve Bank of India (RBI), Dr Raghuram Rajan, demolished the key recommendations of the Financial Sector Legislative Reforms Commission (FSLRC). In what is probably one of the bluntest speeches by any Indian regulator or policy-maker, Dr Rajan opened the doors to a no-holds-barred discussion on financial sector regulation, policy-making and consumer protection. Here are some key issues that he raised.

• “If it ain’t broke, don’t fix it,” he said, opposing FSLRC’s logic of merging all regulators under a unified financial agency. No single regulatory architecture had emerged unscathed from the global financial crisis, he said. Instead, “different regulatory architectures have succeeded or failed based on the circumstances of the country and the quality of the regulator.”

• He found FSLRC’s recommendations on the appropriate size and scope of regulators ‘somewhat schizophrenic’. He said, “There is no discussion of the synergies gained or synergies lost” in bringing all regulators together under one entity, making the “recommendations seem faddish and impressionistic rather than based on deep analysis.”

• Excessive legal oversight and permitting all decisions to be appealed before the Financial Sector Appellate Tribunal could paralyse decision-making and reduce the regulator to a paper tiger.

• There was a need to frame regulatory architecture taking into account the multiplicity of roles and functions of regulators.

Of interest to Moneylife readers is Dr Rajan’s admission that FSLRC’s recommendation on effective consumer protection laws had pushed RBI to focus on the issue. We have seen several pro-consumer decisions in the past few months and RBI has also drafted an excellent consumer rights charter. But that is the easy part.

Unless the charter is backed by time-bound decisions on consumer complaints and stringent penalties, it will be yet another righteous, but meaningless, piece of paper, like the BCSBI (Banking Codes & Standards Board of India) code that banks agree to adhere to.
Explaining his worry about excessive regulation,

Dr Rajan gave this example of the class action element in arriving at a decision. “A bank may attract a lot of complaints from its credit card customers. While no single customer may think the case worth taking to court, and while no customer may be able to prove the bank was in the wrong, the large number of complaints will suggest to the regulator that the bank needs to shape up,” he said.

The regulator can gauge if something is wrong by comparing the nature of the complaints it gets from this bank’s customers with those of other’s. Similarly, “if a particular product attracts a lot more complaints than other products, the regulator can ask the industry to modify the product appropriately, or even ban it,” if it is considered risky to the system. If such decisions are open to appeal, it would lead to distortions, he argued.

One agrees with everything that Dr Rajan says. Especially, since he went on to say that a regulator must earn trust by displaying “the greatest competence and integrity.” We also agree that RBI has ‘maintained a reputation for integrity’, despite the ‘general deterioration in the probity of public institutions’.

But we have an issue over his assertion about RBI’s analysis of complaints to arrive at decisions and internal cooperation between departments. Over the years, Moneylife, as a pro-consumer entity, has noticed that it requires persistent efforts and loud media reports to secure action against even the most brazen exploitation of financial consumers. Not because of RBI’s proactive analysis of complaints. The Banking Ombudsman Act (BOA) was amended to include credit cards only after an avalanche of complaints and mis-selling prior to 2008. The mis-selling of third-party products remains unchecked even today, despite thousands of complaints and gross breach of trust by banks’ relationship managers. This remains outside the purview of the BOA.

In fact, insiders have, often, admitted that, in the absence of a clear consumer protection framework, RBI feared it would be defied or dragged into litigation, especially by foreign banks. While RBI has, indeed, pressured some banks to settle an occasional case of gross abuse, there is no penalty, punishment or payment of interest, cost and damages. Thousands of complaints are ignored because neither the victims nor resource-strapped NGOs can afford to fight long and hard battles against powerful banks and cannot get RBI to intervene every time. It remains to be seen if this will be effectively remedied.

Secondly, on FSLRC’s ‘idealistic view of the benefits of reorganisation’ to create synergies and regulatory uniformity, Dr Rajan argued that “silos within a large bureaucratic regulator may prevent synergies from being exploited” while frequent inter-regulatory meetings could work. He said he got together with the SEBI chairman once a month to sort out issues. This again, is correct in theory, but surely Dr Rajan knows that the High Level Coordination Committee (HLCC) of regulators has failed.

The HLCC brings all financial regulators and the finance ministry to the same table, with RBI as the convener. Yet, it neither prevented an unseemly turf war between SEBI and the insurance regulator, nor led to uniformity in rules governing the advertising and promotion of financial products, nor did it prevented mis-selling of insurance and mutual fund products by bankers. On the contrary, his predecessors tacitly supported this by their silence over the high-cost or toxic products hard-sold by bankers who are incentivised to do this, and are often in a position to arm-twist borrowers.  

Thirdly, Dr Rajan needs to examine how silos within the large and bureaucratic RBI are preventing synergies from being exploited. Moneylife Foundation had submitted a memorandum to RBI with regard to credit bureaus. After a one-day credit camp, we discovered that credit histories were not being shared between the four credit information companies (CICs) licensed by RBI. Consequently, credit reports obtained from the newer CICs were incomplete and even inaccurate. Also, poor systems for correcting discrepancies in credit records caused harassment which had to be fixed by paying unregulated ‘debt doctors’. RBI’s customer services department, although sympathetic, could do nothing about it, because the regulation of CICs was under a different deputy governor and each guarded his turf zealously.

While it is true that this problem won’t be fixed by bundling all financial regulators under one roof, we hope that Dr Rajan will order an internal review to ensure that various consumer-related departments within RBI will act cohesively. It would also be a good idea to implement the Cabinet secretary’s note of 5th June, which asks all financial regulators and banks to cut bureaucracy, scrap redundant rules and regulations, reduce decision-making to four layers and ensure that departments collaborate to improve the speed of decision-making. RBI is known for its slow decisions, mainly because senior officials are forever travelling and there are turf issues between departments. The very existence of large and expensive entities like BCSBI and CAFRAL (Centre for Advanced Financial Research and Learning), which are only seen as sinecures for retired bankers, also need to be re-examined, since they operate like clubs with selective customer interface.

Dr Rajan, some internal blunt talk and action will reassure financial consumers that they are soon going to have a system that is just and fair.

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]