Shaktikanta Das, the 25th Governor of the Reserve Bank of India (RBI), demitted office on Monday, leaving an impressive legacy of navigating several crises during his six-year tenure. Taking charge after his predecessor Urjit Patel’s sudden resignation, Mr Das was thrust into the hot seat almost immediately, having to deal with the systemic shock caused by the collapse of the sprawling, 341-entity Infrastructure Leasing & Financial Services (IL&FS) group, followed by a series of bank and finance company failures. While systemic stability was maintained, depositors and investors bore the brunt of these crises.
In May 2024, I wrote (Shaktikanta Das's Tough New Approach to Reserve Bank’s Supervision) that Mr Das proved himself a tough regulator capable of dealing equally with big influential private banks, non-banking finance companies (NBFCs), politically-powerful cooperative banks (which were brought under RBI’s sole regulatory ambit) and the mergers and clean-up (at a cost of over Rs10 lakh crore to the exchequer) of public sector banks (PSBs). His ability to navigate these, deal with the unprecedented COVID pandemic, keeping upstart fin-tech founders in check, while facilitating technological transformation and managing a harmonious relationship with the finance ministry, has already won him two ‘best-regulator’ awards.
So, this column will focus on Moneylife’s core concern—RBI’s attitude to customer issues. Our interactions with Mr Das as part of Moneylife Foundation’s financial literacy efforts and advocacy convince us that he was genuinely interested in addressing customer concerns. On several occasions, his personal intervention helped resolve egregious complaints. In a couple of cases, public interest litigation (PIL), that we filed, led to action. The external benchmark to reset floating interest loans and UDGAM, a portal to search for unclaimed funds are two such examples.
Achievements and Missed Opportunities
Although Mr Das was keen on addressing issues like unclaimed funds of over Rs1 lakh crore lying with banks and the harassment caused by the know-your-customer (KYC) updation process, the outcomes have unfortunately fallen short of expectation. Despite a six-year tenure, he remained an outsider who was unable to move a rigid RBI bureaucracy to initiate decisive, logical action.
Instead, cosmetic mechanisms diluted customer-friendly reform. Of the 19-odd changes to banking statutes announced by the finance minister last week, only one allowing bank account-holders to have up to four nominees or successive nominations is sure to be implemented. This only brings RBI rules on par with insurance, mutual funds and provident funds.
It is disheartening that many actionable recommendations of the Kanungo committee on customer services remain unimplemented or weakened by vague but tough-sounding directives that are routinely ignored by regulated entities.
Kanungo Committee Recommendations
Periodic KYC updation, mandated under money laundering laws, remains the biggest nightmare for bank customers. Banks inflict financial death or serious financial damage when they freeze accounts without sending the three required reminders. Customers across the economic spectrum face this harassment; but it is vulnerable sections that bear the brunt of it.
In June 2023, the Kanungo committee made a categorical assertion that regulations do not permit the freezing of customer accounts and dishonouring of cheques for want of KYC updation. But RBI has allowed banks continue with this illegal practice without examining the basis of this recommendation. The committee also sought a centralised database linked to a unique customer identifier and the use of video updation, to avoid repeated submission of KYC documents. This suggestion has been ignored, although RBI has updated its master directions on KYC issues 15 times since 2016. Last month, Moneylife reported that banks use re-KYC to collect additional data from customers or to get customers to the branch to sell financial products (KYC Nightmare: How Banks Are Asking for Re-KYCs Illegally and in the Process Collecting Additional Data from Customers). That is probably why several banks do not allow the self-declaration process mandated by RBI.
A clear solution was for RBI to issue standard operating procedures (SOPs), a definitive list of acceptable identity documents, traceability of three reminders to customers and proof of having put in place an e-verification process (when there is no change) through the registered email or mobile number.
Instead of doing this, RBI’s latest directive on KYC asks banks to segregate accounts opened for deposit of scholarships or direct benefit transfers and facilitate credit even if the accounts are frozen and asks the customer service committee to monitor the process. This fails to address the core issue leading to freezing of accounts, which is the mismatch of KYC data such as names and spellings between various identity documents such as, Aadhaar, job cards, permanent account numbers (PANs) and voter cards/ school leaving certificates.
Exhorting banks to improve KYC process, without a clear, formal system of rectifying data based on core documents is pointless unless legacy issues associated with the format of each identity documents are addressed. RBI knows this is a Herculean task; so its solution is to issue the 15th KYC-related directive, with no consequences for banks that ignore the regulator. Is it any surprise that the Kanungo committee’s recommendation to give teeth to RBI’s consumer charter, through ‘incentives and disincentives’ and a ‘regulatory cost’/penalty for deficient customer service, has also been ignored.
As long as RBI remains reluctant to punish banks for needless KYC-related harassment, its endless directives make media headlines but won’t make things any better for customers. There are many such examples.
Ombudsman Scheme: The Kanungo committee noted that the internal ombudsman (IO) created during Dr Raguram Rajan’s tenure was ‘not functioning effectively’. It provided data showing that complaints were rising and less than 25% of them were even referred to the IO. It suggested that the banking ombudsman should be empowered to take a ‘class action’ approach and direct corrective action when there are many similar complaints, with an ‘agnostic common portal for lodging complaints’. The RBI complaint management system (CMS), set up in 2019, already provides such a platform and the ombudsman could initiate suo moto class action by analysing CMS complaints. Instead, customers often allege that the ombudsman simply closes complaints based on technicalities, or after hearing regulated entities rather than customers.
Unclaimed Funds & Inoperative Accounts: Last week, RBI asked banks to ‘urgently’ reduce the number of inoperative accounts and process complaints in three working days. Moneylife Foundation has incessantly highlighted the fact that well over Rs1 lakh crore is lying in unclaimed accounts and even more in dormant accounts. RBI responded by setting up the UDGAM portal to make unclaimed deposits searchable; but, as we have pointed out to Mr Das during an interaction, in the absence of a Boolean search, the portal is almost unworkable. He had assured us that this would be addressed. But instead of doing this, RBI has asked banks to generate a unique UDRN (unclaimed deposits reference number) for each unclaimed account or deposit which would prevent third-parties from identifying the accountholder or bank branch. As always, excessive focus on fraud and misuse will remain a hurdle even to the first step of locating unclaimed deposits in cases where heirs and beneficiaries have scanty details. It remains to be seen if the RBI directive has any significant impact on reducing inoperative accounts.
Clearly, despite his long tenure and genuine interest in improving customer services, Mr Das struggled to overcome entrenched institutional inertia that harms bank customers. As his successor, Sanjay Malhotra, assumes office, we hope that his technical expertise and goodwill would bring fresh momentum to long-pending and obvious reforms that customers could benefit from. Yet, as history shows, empathy for consumers has rarely been a key result area for RBI governors. Before Mr Das, the last governor who championed customer issues was YV Reddy whose tenure ended in 2008.
The baton now passes to Mr Malhotra who must rise to the challenge of aligning RBI’s priorities with the needs of millions of consumers callously treated and left underserved by India’s banking system.
Well written article covering 6 years tenure of Shaktikant Dass and related consumer issues. The new governor is highly qualified and talented person. Hope, he will not bow to pressurizing tactics while deciding the right economic policy and also will be more consumer friendly.
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