It is over a decade now that, we, Indians have been putting up with the harassment, humiliation and mental agony of banks arrogantly freezing savings and current accounts for technical reasons, the most common one being non-compliance with frequent updation of know-your-customer (KYC) documents mandated by the government. Banks blame it on the Reserve Bank of India (RBI). RBI washes its hands off any responsibility by pointing to the Prevention of Money Laundering Act, 2002 (PMLA) and the rules for maintenance of records framed in 2005.
Logically, if the government genuinely has reason to suspect that the money in a bank account or lockers represents the fruit of criminal activity, money laundering or tax avoided income, it can demand explanations and ask banks to freeze the account. But there is something drastically wrong when the power to freeze money, deposited in trust with a bank, is delegated to branch-level staff, who can wreak havoc with the lives and livelihoods of people based on technicalities or wrong understanding of rules.
Freezing a bank account often amounts to inflicting ‘financial death’ of an individual or entity, with a lot of other consequences. Such drastic action (even partially freezing a bank account) should be permitted only after a court order and that too when there are reasonable grounds to suspect criminal activity or tax evasion. Instead, this draconian action is routinely inflicted on ordinary, law-abiding people and long-running bank accounts for routine business activities when there is absolutely no suspicious activity. It is almost always for technicalities, often wrongly interpreted and arbitrarily implemented. At the same time, real cheats seem to dodge the rules with impunity. In the past couple of years, one notorious family alone—the Wadhawans—has inflicted losses running into thousands of crores of rupees on innocent depositors and investors without RBI or the financial intelligence unit of the Union finance ministry having a clue. Dewan Housing and Finance Corporation Ltd (DHFL) was able to keep a whole set of accounts (the infamous Bandra Books) hidden from statutory auditors, while the Wadhawans of HDIL (Housing Development and Infrastructure Ltd) managed to bankrupt Punjab and Maharashtra Cooperative Bank (PMC Bank).
But ordinary people, with genuine issues, are put through untold hardship and nobody cares. Here are three examples which probably represent tens of thousands of sufferers.
•A retired central excise officer in his 80s, living alone in Bengaluru, had his account with a top private bank frozen because his biometrics could not be read. His son was able to get it restored because he knows the senior-most officials at the bank. Fortunately, mandatory Aadhaar linkage has been put on hold.
•In the middle of the pandemic, a UK-based non-resident Indian (NRI) doctor received a notification to update his KYC with just four weeks for compliance. When he asked for the basis for this, RBI asked him to refer to ‘Master Directions’ of RBI which are frequently updated and provide little clarity for individual cases. In this case, the NRI did comply, to the best of his ability, by providing scanned copies of KYC documents, but the bank insisted on ‘self-attested’ documents. One can imagine the hardship this would cause to senior citizens who are not net-savvy, in the middle of a global pandemic and worldwide lock-down. This NRI wrote to RBI’s customer services department (CSD) about how the bank was refusing to process documents without attestation while holding out the threat of suspension. CSD merely informed him that his queries had been ‘forwarded to the concerned regulatory department’ without going into his grievance about the ‘unfairness’ of the bank’s demand.
•The third case was that of Moneylife itself. Despite our knowledge and activism on depositor issues, just four days before salaries were to be paid, Axis Bank froze our main bank account (operational since 2009) at the end of September 2020 because one of our shareholders had not submitted a ‘beneficial ownership’ declaration. Worse, the requirement itself was wrongly understood and demanded by the Bank. The action was preceded by a long correspondence over Axis Bank’s faulty understanding of who was a beneficial owner (in this case, the person lives abroad and is neither a director nor a signatory to the account). But repeated emails and messages to the Bank’s customer service department, public relations team, head of retail as well as the managing director and CEO did not elicit any response, until we escalated the matter to the central bank.
Most banks operate on the principle that the customer is always wrong or trying to dodge the rules. Despite core banking software and extensive use of technology, nobody at the Bank paused to consider that this account existed for over a decade; we have six other accounts at the same branch and we were in the middle of a pandemic, with limited access to staff. One official at the Bank refused to touch the resubmitted papers or discuss the issue, while the branch-head used to summon our accounts manager and give him vague oral instructions, refusing to put things in writing. If this happens to a media organisation (which usually get a response), one can only imagine what happens to customers with no access. But more on this later.
The issue is serious, because unilaterally freezing an account would have a series of consequences on standing instructions, for loan repayments, credit card payments or utilities bill payments which may get cancelled or bounce. A senior citizen living on a pension may be made helpless for no fault. Or an organisation, like ours, could have defaulted on paying salaries without any reason, in turn, impacting payments by employees. Surely, there ought to be consequences to inflicting such damage on law-abiding people? As an activist organisation, involved in financial literacy, we decided to find out the circumstances in which banks are allowed to freeze legitimate accounts and how many accounts had been frozen by Indian banks so far.
My colleague, Yogesh Sapkale, filed an application under Right to Information (RTI) Act asking RBI for specific regulations or guidelines with regard to freezing customer accounts by banks. The answer: “We have not issued any specific instructions in this regard.” It, however, directed us to the ‘Master Directions’ issued in 2016 and amended repeatedly, including ‘partial freezing’ and payment of interest available on its website.
He also asked RBI for the total number of accounts and deposit balances, bank-wise, of accounts frozen by all nationalised banks and private banks from 2017 until end-2020. The answer: “We do not have any specific information in this regard.”
In a nutshell, RBI is clueless about the havoc caused by its ‘master directions’ and couldn’t be bothered to collate any data on the hardship caused or extent of money blocked and the implications of these on ordinary, law-abiding people. This is done in the name of preventing money laundering which seems to continue with impunity.
In our case, I, finally, connected with someone very senior at RBI who can’t be named. I explained that Axis Bank’s understanding of beneficial ownership was not shared by a larger bank with which also we had an account. I was also at pains to explain that we were not avoiding compliance, but complying with Axis Bank’s faulty demand; the Bank was forcing a wrong declaration from us. Gratifyingly, I was heard and things began to move rapidly after that. Multiple calls from Axis Bank followed, even at 10pm and the account was unfrozen in a couple of days.
Once it was done, we followed the policy that Moneylife had always advocated—to vote with our feet when an organisation is so callous about customer service. We closed all six of our accounts with Axis Bank, since it was clear that going all the way to the top was also useless and we cannot always ask RBI to intervene. Closing a bank account in India and opening a new one is a long and tedious process that took nearly three months to complete. Bank account portability is possible today; but is not being implemented, to help banks. However, that is the subject of a separate column.
Ideally, aggrieved customers should be in a position to demand compensation for such harassment; but this involves expensive litigation which gives banks a huge advantage in a judicial system that neither awards exemplary damages nor allows lawyers to handle cases on a contingency-fee basis.
Note: If you have experiences like these, please write to us at [email protected]. We want to take up this issue systematically.