Banking sector needs laws to protect customers' interest
By Sucheta Dalal
The Reserve Bank of India (RBI), after several decades of having supervised banks, recently took the first tentative steps towards acquainting itself with that creature called the ‘ordinary consumer’ of banking services. Although India’s banking industry, especially after nationalisation, has grown with the stated objective of taking banking services to the masses, in practice, RBI’s regulatory systems keep a distance from depositors and their problems.
This didn’t matter when the Indian Banks Association regulated service charges; but the entry of new private and foreign banks together with increased automation has seen mounting confusion over the wide array of banking options and loans, the high degree of automation and the plethora of costs and fees imposed on customers
As with the telecom industry, bank statements are getting extremely difficult to understand and the more modern banks are causing untold grief to customers by debiting large chunks of money as fees for facilities that were never charged earlier.
Faced with escalating complaints, the RBI set up a Committee headed by former well-known central banker, S.S.Tarapore. It is called the Committee on procedures and performance audit on public services (CPPAPS) of banks. All banks have been asked to set up ad hoc committees to examine customer services in their respective banks and send their reports to the CPPAPs; it in turn will recommend measures to improve the quality of bank customer service and provide a dispute resolution mechanism.
In a nutshell, the committee will look at whether the regulatory system works for ordinary customers with reasonable efficiency and swiftness. The last few years have changed the face of Indian banking. Automation has increased accessibility of services and ease of operations, but only a small segment of users are comfortable with it. New private banks have indeed laid out the red carpet to attract large customers; but they only want young account holders who will borrow heavily for their homes, cars and consumer durable. Older citizens, have been hurt by declining interest rates and are of little interest to aggressive private banks.
Curiously, after the initial excitement at being wooed, the dissatisfaction level with quality of service runs high. Consumers discover that every time they have a real problem, the regulatory framework for their protection is virtually non-existent. Yes, there is the office of the Banking Ombudsman, but it is not adequately empowered to be truly effective.
Recently, the Consumer Education and Research Centre (CERC) of Ahmedabad conducted a small survey of 54 respondents on the quality of banking services in relation to customer credit facilities such as personal loans, car and home loans and credit card services. Based on its findings and other anecdotal evidence, Prof. Manubhai Shah, Chairman Emeritus of CERC, has demanded a clearer and less complex consumer credit law, and the setting up of a Consumer Credit Regulatory Commission at central and state levels to regulate lender-borrower relationships and to resolve disputes.
At the least, he wants an amendment to the Consumer Protection Act to make it easier for depositors to access consumer courts. Prof.Shah made this demand during his presentation at the Asian Conference on Regulation of Consumer Credit at Kuala Lumpur organised by Consumers International at the end of March.
The CERC study showed that investors’ biggest complaints were about unfair and one-sided contract terms, undisclosed fees, usurious service charges and unclear interest rates, incorrect calculation of Equated Monthly Installments, restrictions on prepayment of loans, excessive securities/guarantees, unethical recovery drives, low consumer awareness, misleading advertisements and gift offers, selective waiver of fees and ambiguous add on cards etc.
The underlying theme of these complaints was the lack of clarity about fees and charges levied by banks, which were simply debited to customer accounts without explanation. Bank statements themselves are no longer be deciphered by simply checking debits and credits. For instance, most customers are never sure if the auto and reverse sweep facilities offered by banks work in their favour or against them.
The largest number of complaints are over the high fees and repeated hikes in service charges by private banks. A consumer says, ‘‘It is surprising that Reserve Bank of India which oversees these banks allows such brazen banking practices which seek to denude the unwary customer with charges, out of all proportion to the service rendered and totally out of sync with the charges of Nationalized Banks’’.
According to Prof. Shah, there are no specific regulations or laws regulating the management of consumer credits in India; the RBI has only issued ‘Guidelines on Fair Practices Code for Lenders’ on 5 May 2003.
Moreover, most contracts allow the lending bank to unilaterally alter their terms, limit or modify their performance and vary the terms. Consequently, terms of the contract with borrowers are often one-sided and unfair. Under British law, the Unfair Terms of Contract Act ensures that courts do not give effect to one-sided contracts or unfair conditions in contracts. CERC plans to lobby for the enactment of such a law in India too. It argues that loan contracts should also provide a ‘cooling off’ period, whereby a consumer can cancel the contract within a specified period, even after it has been signed.
According to Prof. Shah, a comprehensive Consumer Credit Act is needed, as the current piecemeal law fails to distinguish between individual consumers and commercial transactions; and hence denies non-business consumers their rightful protection. In effect, the regulatory framework, as it exists, does not take into account the needs and interests of bank depositors or borrowers.
In case of nationalised banks, the problem is slightly less acute. Competition has forced these banks to become more responsive to customer needs and less bureaucratic; their fees and charges are also lower than those of private and foreign banks, although they have been rising steadily. It is the Tarapore Committee’s mandate to check if the banking system works against ordinary consumers and recommend ways to stop unjust enrichment of banks.
It is up to the committee to decide whether various banking regulations can provide an effective redressal mechanism, or if it should also pitch for a Consumer Credit Act and Consumer Credit Regulatory Commission, as suggested by Prof. Shah. Either way, it is clear that there is need to initiate measures for improving customer protection.
Disclosure: The writer is a Trustee of CERC, Ahmedabad.