Speeches

Protecting the Banking Rights of the Common Man
[ March 15, 2007 on the occasion of World Consumer Day in a function organised by the 
  All India Depositors Association in Mumbai]

Introduction

As today is World Consumer Rights Day it is only apt that we focus attention on issues pertaining to safeguarding the banking rights of the common man. I am grateful to the All India Bank Depositors’ Association and other institutions which have sponsored today’s meeting for giving me the opportunity of interacting with you. The All India Bank Depositors’ Association was founded in 1968 before the nationalisation of banks. The founding fathers of this Association, Mr. D.N. Patodia, Mr. P.M. Reporter, Professor P.J. Shroff and Mr. M.R. Pai felt that although the depositor is the heart of the banking system his pivotal role in the banking system, is not recognised, his rights are not addressed and his interests receive the lowest priority. Almost 40 years have passed since then, but sadly we are nowhere near reaching the cherished goals.

At the outset, let me say that while I will be drawing attention to certain deficiencies in customer service, I should categorically emphasise that in the recent period there has been a welcome and significant improvement in the overall approach of banks to customer service. I may mention, specifically that banks have been distributing their Code of Commitment to customers; have appointed Code Compliance Officers; are in the process of displaying their Tariff Schedule and formulating a Compensation Policy, Cheque Collection Policy, Security Repossession Policy etc. which will go a long way towards greater transparency in dealing with customers.

Banks woo corporate clients while the RBI and associations like the AIBDA have been struggling since the last 40 years to get banks to recognise the interests of the depositor and render proper service to him. Banks feel that profits emanate from the credit portfolio and ancillary services. What is often overlooked is the fact that without deposits there would be no credits. In this talk today, I propose to outline the efforts being made to redress the woes of the Aam Aadmi, particularly in his role as depositor and the approach we need to follow in the ensuing period.

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Pre-eminence of depositor

It is a harsh fact of life that in the firmament of the banking system, the large borrower is the most valued segment followed by smaller borrowers; the poor depositor is the far relative in the system. In the banking system, we often think about the importance of owners (i.e. shareholders), regulators and the borrowers but the real fact is that none of these can claim to be the real owners of the banking system. Make no mistake about it: without the depositor there would be no banks. The All India Bank Depositors’ Association has, no doubt, been fighting for the depositor’s rights but it is time the depositors themselves stood up for their own rights and assert themselves as the real owners of the banking system. Furthermore, it is the individual depositor and not institutions that predominate in deposits.

To understand the preeminence of the individual depositor, I would like to place a few statistics before you. According to statistics published in the RBI, Bulletin, July 2006, as on 31st March 2005, Savings Bank deposits amounted to Rs.472,147 crore forming 26 per cent of total deposits of scheduled commercial banks. The savings bank deposits of individuals amounted to Rs.364,869 crore or 77 per cent of the total savings bank deposits. These savings bank deposits are remunerated at 3.5 per cent per annum; in fact, the effective rate is as low as 2.8 per cent approx. This is because the manner of calculating interest on savings bank deposits is such that a part of these deposits are not given any interest. (interest is paid only on the minimum balance between the 10th and the end of the month). These low cost funds are leveraged by banks and lent at high rates of interest which is a main source of their profits. In these days of electronic wizardry is it necessary to continue to follow this methodology for the ease and convenience of banks at the cost of the depositor?

Regrettably, depositor interests have received low priority even from the Government. Why is it that income earned through savings bank deposits at a mere 3.5% rate of interest attracts income tax, whereas income earned through investments in equities and mutual funds are tax free. Moreover, longer-term bank deposits, at relatively higher interest rates, enjoy the 80C deduction from income while this is not available to savings bank accounts. The system, therefore, appears to be stacked against the Aam Admi.

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Basic Ingredients of Customer Service

When we talk of customer service we mean basically three things: (i) providing minimum banking facilities of receipt and payment of cash/cheques at the bank’s counter; (ii) acting fairly and reasonably in all their dealings with the customer; and (iii) ensuring that their dealings with the customer rest on ethical principles of integrity and transparency.

Providing minimum banking facilities of receipt/payment of cash/cheques is a primary requirement but there are deficiencies in service. If a customer goes with cash for deposit the bank either slaps a charge for receiving and counting the same or asks you to deposit the same with prior appointment. Some banks refuse to open an account of, say, a small petrol pump owner because it would mean daily receipts of cash. As regards receipt of cheques, banks invariably do not acknowledge receipt of cheques over the counter. Banks which fail to provide this primary and minimum banking service, do so on the specious ground that it involves a lot of counting and sorting work. With regard to the non-acceptance of soiled notes the reason given is that if the RBI refuses ultimately to accept the soiled note because it is not covered under the Note Refund Rules then the cashier has to make good the amount. Well, the same rule applies to the cashiers of RBI so why should it be any different for banks. In any case, why should the depositor be penalised for this.

The second basic customer service of acting fairly and reasonably in all their dealings with customers, prima facie, sounds easy and simple but, here again, there are hurdles. The term “fairness” is flexible and dynamic and it is not possible or useful to produce a definition of “fairness” which can be sustained. What fairness means may vary depending on the bank’s business and its customers but whatever the business or customer base, the fairness needs to be evident. While banks have the right to decide what products and services they offer and be guided by commercial considerations in the pricing of such products and services, they have to be reasonable, e.g. some banks force customers to use ATMs for withdrawal/deposit of cash and then fix charges for use of ATM; or if there are only periodic credits into an account and no debits, some banks impose a charge on the grounds that the account is inoperative; or charges for depositing a cheque which bounce, (for no fault of the depositor), charges for balance enquiry and charges for cheque status verification. No one disputes the right of the bank to fix charges but are these fair and reasonable? The state of affairs in this area reached such a low ebb that the Reserve Bank had to recently step in and issue necessary regulatory guidelines.

The third basic customer service relates to ensuring that banks’ dealings rest on ethical principles of integrity and transparency. Stealth banking, while seemingly offering free products or services, actually imposes charges under some garb or the other such as renewal fee etc.; undue enrichment through excessive rounding off; negative option marketing; tying up of products e.g. compulsory insurance coverage etc.; selling personal information; etc. - these are some examples of unethical banking practices. Coupled with non-transparency it leads to an information asymmetry which renders the banker-customer relationship one of unequals. In this context, it is pertinent to mention a Supreme Court judgement regarding the non-enforceability of a contract entered into between two unequal parties.

Although all banks unanimously agree that customer service is their priority we continue to have breaches of basic regulations on customer service. As the RBI Governor, Dr. Y.V. Reddy put it:

“statutory regulatory instructions are set out in letter but sometimes, may not be carried out in spirit.”

It was recognised by the RBI that for a significant, qualitative and enduring improvement in customer service what is required is not just statutory regulation but a fundamental change in the overall approach to customer service.

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Evolution of the BCSBI

For quite some time the RBI has been endeavouring to assess the quality of customer service at the grass roots level. This evaluation was necessarily based on anecdotal evidence as revealed by in cognito visits to banks. Although, a number of customer service friendly regulatory measures were taken in 2004-05, Governor Dr. Y.V. Reddy was of the firm view that there ought to be a more systematic and on-going evaluation of customer services and a system of remedial action should be put in place.

The setting up of the Banking Codes and Standards Board of India (BCSBI) evolved out of this felt need and it is unique in the sense that it is an independent body promoted by the RBI and the scheduled commercial banks (public, private and foreign) and the approach is a collaborative effort rather than a regulator - regulatee relationship.

The membership of the BCSBI is restricted to scheduled commercial banks and 67 banks are members. These 67 banks cover almost 98 per cent of the total domestic assets of scheduled commercial banks, the total number of bank branches in India as also the total number of savings bank accounts.

With a view to making the BCSBI an effective autonomous body, the Reserve Bank is reimbursing fully the Board’s expenses for the first 5 years. The object of the financial support to the Board is to make it economically strong enough in it’s initial years so that it can function without feeling the pressure or threat from any single member bank. In the meanwhile the annual membership subscription being collected by the Board would serve as contribution to the setting up of a corpus which would ensure that the Board is self-financing when the RBI funding phases out.

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Code of Banks Commitment to Customer ( CODE)

The BCSBI, together with the Indian Banks’ Association, has brought out a Code of Bank’s Commitment to Customers which each member bank has to make available free of cost to each individual customer. Thus, for the first time the common man has a Charter of Rights in his possession which he can refer to while dealing with his bank. The full text of the code has been published by the RBI, in the public interest as a part of its Customer Education Campaign in leading newspapers in Hindi, English and 13 regional languages. The Code is also available on the BCSBI website www.bcsbi.org.in . Customers should insist that their branch office supplies them a copy of the Code. I am glad to say that a few banks have already provided the Code to all their customers but some banks have still to do so.

The Code sets out minimum standards of banking practices for banks to follow and covers all products and services, like deposit accounts, remittance facilities, Government transactions, Note Exchange Facility, safe deposit lockers, loans, foreign exchange transactions etc. offered by banks to individuals. It emphasizes on transparency in banks’ dealings with its customers. To achieve the avowed transparency, the Code provides for documentation of banks’ fees and service charges, in the form of a Tariff Schedule which is required to be displayed on the bank’s website and in each branch. The Code also gives a right to customers to peruse the Tariff Schedule free of any charge. The Code lays great emphasis on providing full information to the customer before a product or service is sold to him. For post sale conduct the Code insists on banks giving one month’s notice to the customer before making any change in their tariff schedule or any change in terms and conditions, governing the product, which may adversely affect the customer.

The cardinal principle that runs across all the provisions of the Code is that banks should not rely on implicit consent from customers and all products and services should be sold to the customer only after obtaining his explicit consent in writing. As a logical corollary of this principle, the Code prohibits banks from providing unsolicited credit in any form including credit cards.

The Code addresses the issue of Right to Privacy of Customers and the Indian Banks’ Association is actively in dialogue with the Telecom Regulatory Authority of India (TRAI) for the setting up of a “Do not Call Registry”. In the meantime, no bank can disturb its customer for telemarketing unless and until the customer has given in writing that he desires to receive such calls from his banker. The banks have also committed that the information not essential for account opening would be sought from their prospective customers, separately, only on voluntary basis and that they would not part with personal information collected by them, for any commercial purpose without seeking the prior consent of the customer.

Member banks have also committed to have three policy documents in place viz., a Cheque Collection Policy, a Compensation Policy and a Security Repossession Policy. While the Cheque Collection Policy will deal with all issues related to clearing/collection of cheques by banks for their customers, the Compensation Policy will deal with the transparent mechanism to be followed by banks in compensating their customers for financial losses incurred due to undue delays, failure in executing mandates or erroneous debits etc. The Security Repossession Policy would deal with the procedures to be followed in taking possession of security by the bank where the borrower has failed in his repayment commitment. The Policy is also required to address the issue regarding immediate release of security when the necessary payment has been made by the customer. Each member bank will have to place these policy documents in public domain.

Another significant feature of the Code is that it is applicable to the third party products sold through bank branches and the banks are under obligation to ensure that their Direct Sales Agent also comply with the provisions of the Code.

Through the covenant or agreement signed by each member bank, the bank binds itself voluntarily to adopt the Code for implementation and to observe it, in letter and in spirit. On its part, the BCSBI’s efforts would be to take collaborative remedial action in rectifying the systemic deficiencies in banks, rather than through a system of coercion and penalties.

It will therefore be seen that BCSBI combines the best of statutory regulation and self-regulation. It is a collaborative effort between banks and Reserve Bank, not only in its origin but also in purpose. While banks becoming member of the BCSBI agree to observe the Code, the Reserve Bank will derive supervisory comfort from banks being members of the BCSBI as it would look into systemic issues that impinge on customer service and financial inclusion. The spirit of collaboration is further reinforced by the general consultative approach adopted by the BCSBI in formulating the Code and in its implementation.

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Governor Reddy has said that:

“those banks which adhere to the BCSBI Code, would provide the RBI necessary supervisory comfort, and I have no doubt that all the banks will join the mainstream”.

Banking is a trust based relationship and the banking licence from the RBI provides an assurance of trust to the public at large. While major foreign banks operating in India are members of the BCSBI, there are foreign banks with one or two branches (one bank with as many as eight branches) which have not sought membership of BCSBI. A recent report in the media stated that “one-branch” foreign banks feel at home here performing only select banking functions. These banks by virtue of the banking licence from the RBI collect deposits from the Indian public, run their banking operations in India with these resources and remit profits abroad, but do not wish to commit their bank to providing to their customers minimum banking services under the Code. Regrettably, there is even a public sector bank which has yet to apply for membership of BCSBI. If one is serious about protecting customer rights of the common man and ensuring customer service to him, surely the banking licence issued to such banks should ensure that individual customers and their precious savings are not with banks which do not subscribe to an industry wide Code of Commitment to Customers.

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Evaluation of Banks' Customer Service

The BCSBI has commenced field visits to banks to assess the actual position with regarding to implementation by banks of the provisions of the Code. No doubt, BCSBI would endeavour to bring about correction of systemic deficiencies in customer service by working with the concerned member bank in a collaborative spirit. But if it is observed that the bank is making little or no effort to fulfill its commitment to its customers, then in extreme cases, the BCSBI would not hesitate to publicly censure the bank. It is altogether another matter as to how the RBI, which is the authority appointing the Chairman/CEOs of banks, would then judge their fit and proper status for holding such positions.

As for the customer, no longer should he hold back and take whatever banks dole out. He has his Charter of Rights with him and is now sufficiently empowered. If he does not read it or use it he is the loser. To quote the late Shri M.R. Pai :

“The biggest asset on the balance sheets of banks today is the ignorance of customers of their own rights, and their reluctance to fight for them”.

If he sits back and merely grumbles to himself he will be the sufferer. I am well aware of the fact that absence of complaints does not mean there are no complaints. I am also aware that customers are afraid to complain lest there be "retaliation". I would only urge the individual customer to shed his fears and demand his rights as enshrined in the Code. There are now several avenues before the customer to seek redressal of his grievances. Let me list some of these:

1. Every branch has to have a Help Desk or at least an officer designated for this purpose whom you can approach for answering your queries.

2. There is a Code Compliance Officer whose name, address and contact numbers are required to be displayed at each branch. For any perceived violation of the RBI regulations/Code provisions you can contact him or correspond with him.

3. If you complain in writing the bank is required to send you an acknowledgement/response within a week. If your complaint is over the phone the bank is required to provide you a complaint reference number and keep you informed of the progress within a reasonable period of time.

4. If your complaint cannot be redressed by the branch manager he is required to escalate the same i.e. promptly refer the case to higher levels.

5. If your complaint is not redressed to your satisfaction by the bank, within six weeks of receipt of your complaint, the branch staff is required to encourage you to approach the Banking Ombudsman.

6. The name and address of the Banking Ombudsman and particulars of the Banking Ombudsman Scheme 2006 is required to be displayed in each branch. Under the Scheme, in brief, a customer can file a complaint with the Banking Ombudsman for non-observance of any regulation, instruction or direction of the RBI and non-adherence to the Code adopted by the particular bank in relation to banking or other services. Thus the Banking Ombudsmen would continue to attend to the redressal of individual grievances and BCSBI does not either duplicate or supplement the Banking Ombudsman Scheme.

7. Banks are also covered by the Consumer Protection Act, 1986 which is a central legislation administered by State Governments. Consumer Courts have been set up under the Act on a three tier basis. At the lowest rung is the consumer district forum with jurisdiction upto Rs.20 lakh. The next rung is the State-level Redressal Commission to hear appeals from district fora and to consider complaints involving claims for compensation between Rs.20 lakh and Rs.one crore. At the apex is the National Consumer Redressal Commission to hear appeals from the State Commissions and to consider cases involving over Rs.one crore. The National Consumer Redressal Commission and the Supreme Court have in the recent part issued exemplary awards for compensation which ought to have been a wake up call to banks on their dereliction of duties to the customer. Two judgements of the Supreme Court are worth citing:

1. In one case the Supreme Court laid down that it is the banks' prime duty to scrutinise every client who comes for a loan and assess his credit worthiness. If the basic work of selection and assessment itself is shoddy and consumers are lured to take loans, which they may not really need or are beyond their repaying capacity, then, clearly banks need to justify their actions for recovery.

2. In another case the Supreme Court held: "Nothing is more damaging than the feeling of helplessness. An ordinary citizen instead of complaining and fighting, succumbs to the pressure of undesirable functioning in offices……… Therefore, the award of compensation not only compensates the individual, satisfies him personally but helps in curing social evil. It may result in improving the work culture and help in changing the outlook.”

Judgements such as these and the Compensation awards given by the National Consumer Redressal Commission have not only boosted the flagging morale of the individual customer but also motivate institutions like the BCSBI to continue with their uphill task of rectifying deficiencies in the banking systems in a collaborative manner.

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Summing Up

While I have tried to set out some of the key developments and the problems being faced, let me say that the institutionalisation of the monitoring of customer service in a collaborative spirit would progressively result in an improvement in customer service. It may not be out of place to mention that the Indian Banks’ Association has been very supportive of the Board in our endeavour to improve customer service in the banking sector. Our thanks are due to them. I am very confident of getting their continued support in future as well. Adhering to the regulatory framework relating to customer service is mandatory and deviations should invite adverse action. The BCSBI sees itself as following a participatory approach to ensure that complaints between regulator and regulatee are kept to the minimum. Banks must realise that if they violate the regulatory framework they could well face action in terms of withdrawal of certain activities. The role of the BCSBI could be to use strong suasion to ensure that banks provide the minimum standard prescribed in the regulatory framework and elaborated in the Code. Bank depositors also have a duty in that they should shed their chains, built out of sheer ignorance, and be aware of such aspects of the Code as are applicable to their bank. Banks in turn must appreciate that they cannot continue to thrive on the ignorance of depositors. The challenge for the BCSBI lies in the removal of ignorance among customers and sensitising banks to their own voluntary commitment to provide quality customer service.

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