Limited free ATMs use is only the latest blow. Financial consumers are also affected by the inability of regulators to act in time to prevent companies folding up and the lack of regulation and repeated failure of cooperative banks
A few weeks ago, the Reserve Bank of India (RBI) allowed banks to charge their account-holders for transactions on automatic teller machines (ATMs) beyond a threshold limit, with especially stringent limits for six metro cities. Tamizharasan, an advocate from Madurai, was the first to get off the mark to file a public interest litigation (PIL) against this decision. The court (Madras High Court bench in Madurai) issued notices to RBI and the Indian Banks’ Association (IBA) giving them three weeks to respond.
The PIL alleges that RBI’s move is regressive, in support of select banks, against public interest and should be quashed. Interestingly, on the very day that the media reported this issue, Moneylife Foundation’s trustees too had come to the conclusion that a PIL was the only way to challenge the action.
Our regular readers would recall that Moneylife Foundation, along with a few other consumer organisations, had protested strongly against this action by RBI; we sent two memorandums. RBI had come out with a strong backing of the bank cartel’s action and claimed credit for at least mandating a certain number of free transactions and capping the charges.
RBI conceded to only one demand—about the need to create a system for reporting non-functioning ATMs. Here, too, its response was absurd and callous. An official, writing on behalf of the governor, said that RBI will ask IBA to “incorporate ways and means through which customers are enabled to report about ATMs which are not in working condition to the banks.”
Is RBI so naïve as to believe that banks do not know which of its ATMs is not functioning or have not bothered to load adequate cash? On 15th November, Saturday morning, as the weekend was just beginning, the ATM attached to a busy Shivaji Park branch of Axis Bank in Mumbai had no cash. Should one believe that the Bank was unaware of it? As a customer, I reported this fact to the Bank. What difference did it make? Nothing. The Bank gets away with it because RBI does not care. Consumers want action, not a reporting system.
When the regulator supports a bank cartel by readily accepting their claims about transaction costs without exploring ways to reduce them, what option do depositors have? Only what advocate Tamizharasan has done—file a PIL. But it is important to get the facts and the issues right, to make it effective.
Fortunately, there are plenty of absurdities in the banks’ claim about limiting free ATM usage charges. First, the stricter limit on ATM transactions applies to six metros, when, in fact, the higher number of transactions should lead to lower costs. Secondly, in-bank transactions, which are much more expensive, are not being charged—unless RBI plans to permit those, too, in the near future.
Interestingly, ATM charges were a subject of hot debate at an Open House session by Moneylife Foundation on 22nd November, with its new trustees—TS Krishnamurthy (former chief election commissioner of India), Dr KC Chakrabarty (former deputy governor, RBI) and Siddharth Das, COO payment systems at Flipkart.
Dr Chakrabarty, well known for his brutal outspokenness, said, “I don’t agree with the institutional view of the RBI… on allowing banks to charge for withdrawals from their own banks.” He demolished the claim that customers must pay for services saying, “If banks want to move to a system of transaction fees to be paid by customers, then they must also be prepared to work at very low interest spread. They cannot pay 4% on savings accounts but charge 12% or more on advances and also charge customers for transactions.”
The low level of consumer activism in India, he said, was forcing consumers to put up with many types of uneven contracts that were bad in law. For instance, he said, a customer is penalised if his cheque bounces (it can even become a criminal case); but a bank that wrongly dishonours a cheque, gets away with, at best, an apology.
TS Krishnamurthy had a similar view when asked about the plight of investors in company deposits, ponzis, chit funds, collective investments schemes and non-banking finance companies. “We need a separate authority to regulate deposit-taking companies and it must be removed from the Companies Act.”
Two other issues that are clear pain-points for ordinary savers came up for agitated discussion. The first was the inability of regulators to act in time to prevent companies folding up and the lack of regulation and repeated failure of cooperative banks.
Well-known investment analyst, Ambareesh Baliga, asked Mr Krishnamurthy why it was difficult for the ministry of corporate affairs (MCA) to act on investor feedback/complaints about companies. He also wanted to know why the Investor Education & Protection Fund, of over Rs1,000 crore, could not set up a separate body to take care of investors’ issues.
Mr Krishnamurthy’s broad reaction was identical to that of Dr Chakrabarty. He said, “I totally agree that the present system of investor education and protection is grossly inadequate and there is a need to review it.” He said a lot of money was being spent on investor education but not on protection.
He further said that the new Companies Act had more provisions for regulatory action by the government; but the existing inspection machinery is absolutely inadequate. The ministry takes several years to complete inspection reports by which time the problem has worsened drastically or the company has folded up.
He wondered why the formula adopted to keep Satyam Computers alive was not used in all other cases, where companies are spiralling out of control. He said, if the government had decided to organise the takeover Kingfisher Airlines and change its management in time, it would have saved thousands of jobs. Instead, by the time the ministry completes its report of unviable companies, they have usually shut down, with enormous job losses. Even as we go to print, there are reports of SpiceJet cancelling flights and a fear that the company is headed the Kingfisher way. Just like an investor protection authority, India needs a corporate restructuring authority that nurses sick companies back to health rather than encourage them to die, as is the case with India’s Bureau of Industrial and Financial Reconstruction (BIFR), he said.
When it comes to cooperative banks, which are at least partly under the RBI’s benign watch, the situation is almost scary. Dr Chakrabarty said that dual regulation is part of the problem but not the only one. He said many rural cooperative banks did not even have a licence to operate but were doing so. Responding to a question, he said, “Some have applied for a licence in 1966, but RBI has not yet decided on it.” A bank analyst in the audience pointed out that consumers were expected to make informed choices, but many cooperative banks were not even obliged to put out their annual reports.
At the end of a brutally honest interaction with two people who have held top offices in their respective fields, it was clear that the state of the financial consumer was far more worrying than we thought.
Mr Krishnamurthy suggested the need for research and surveys to find out why most investors are not being protected today—particularly the small investor. Dr Chakrabarty is clear that a separate body for financial redress is the answer and he saw hope in the fact that there is a global consensus on this issue. Over the past five years, Moneylife Foundation’s efforts have only validated this view.
Investors have as many complaints, or more, about the insurance regulator and the capital market regulator. Both are perpetually tinkering with rules while ignoring basic confidence-building actions like grievance redress, compensation and punishment for wrongdoing.
(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])
