Speeches

Of Dr. Jekyll Retail and Hyde Recoveries
[ On October 16, 2007 at the IVth International Forum on Financial Consumer Protection and Education organized by
 the Hungarian Financial Supervisory Authority held in Budapest, Hungary 
BY Smt K.J. Udeshi , Chairman]

I deeply appreciate the opportunity given to me by the Hungarian Financial Supervisory Authority to participate in this Conference of topical interest. Central banks, the world over are increasingly recognizing that their responsibilities go beyond the core functions of monetary policy and ensuring financial stability. Improving access to financial services is one such additional responsibility that many central banks have been charged with. Access to financial services and the quality of those services, both have a decisive influence on the economic success of small and medium enterprises and welfare of individual households.

Access to financial services or financial inclusion is two-dimensional - access to a bank account for depositing savings and access to the credit markets for borrowing. In an era of virtual banking and ATMs, when banks do not want any footfalls at the branch, central banks have had to resort to legislation, as in the USA, to provide “basic” or no frills banking services to low-income customers. Banks tend to look on the opening of a bank account with minimum charges and perhaps even minimum withdrawal facilities as an “additional cost” - often forgetting that if there are no depositors there would be no bank.

The story is, however, different on the credit side where banks rush to lend for personal loans, housing loans or credit cards. In their keenness to enlarge the loan book, (and thereby improve their NPL ratio statistically) banks give scant attention to the borrowers capacity to repay. This is a world-wide phenomenon, especially when there is excess liquidity sloshing around. Excess liquidity puts downward pressure on lending rates and hence the search of vulnerable sections to lend to who are price takers. Slack lending decisions at such times invariably lead to harsh actions against the borrower at the time of recovery. In India, the Supreme Court has held that if the basic work of selection and assessment (of a client) 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. Recovery through agents, as a system, is here to stay and trying to regulate them would in no way attack the problem or provide the solution. What consumers need is protection from irresponsible, “predatory” lending by banks.

Consumer protection through greater financial education and awareness programmes and through Credit/Debt Counselling, both at the pre-sanction stage and at the recovery stage, if there are difficulties in making payments, are, imperative. Equally, the existence of personal bankruptcy or insolvency laws would be of help to the consumers. Central banks have a vital role, in as much as, their initiatives towards greater financial inclusion have to be matched by regulatory forbearance to ensure that the unfortunate low-income borrowers who are linked to flexible rates are protected from unanticipated consequences.

Countries like the USA, South Africa and the European Union have consumer credit legislations. In the USA and the European Union it is entirely left to civil society organizations to lobby for fair practices and ensure legislation to curb malpractices, whereas South Africa has a regulator in place to regulate the retail credit industry.

There has been debate on the choice between statutory regulation and self regulation for oversight of customer service in the financial sector. Statutory regulatory instructions are set out in letter but are not carried out in spirit. Self-regulation may be apposite in dealing with deficiencies in service but it has not been an effective and efficient tool for raising standards of service perhaps partly because of conflicts of interest that such structures may encounter. There is, therefore, a felt need for a dedicated agency which exclusively focuses its attention to maintenance and enhancement of standards of banking services, particularly for individuals and small business enterprises.

Banking Codes and Standards Board of India (BCSBI)

To build on the positive features of both systems, in India the Reserve Bank of India has, with the active participation of commercial banks, set up a Banking Codes and Standards Board of India (BCSBI) to monitor and ensure that, while providing services to individual customers, banking codes and standards voluntarily adopted by banks are adhered to, in letter and spirit. These industry wide norms have been codified in the form of a Code of Bank’s Commitment to Customers (Code) which has been evolved in consultation with the banking industry. This Code, is in effect a Charter of Rights which an individual customer can expect as a minimum standard of service. The Code emphasizes on transparency in bank’s dealings with its customers and the cardinal principle which runs across all the provisions is that banks should not rely on implicit consent from customers and any product or service 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 also provides for automatic compensation to be paid for any financial loss incurred by a customer due to undue delay, negligence, failure in executing mandates or erroneous debits. The provisions of the Code are applicable to third party products sold through bank branches and the banks are under obligation to ensure that their Direct Sales Agents comply with the provisions of the Code.

Banking is a trust based relationship and the banking license from the Reserve Bank of India (RBI) provides an assurance of trust to the public at large. Dr. Y.V. Reddy, Governor, RBI, has, expressly stated that those banks which adhere to the BCSBI Code would provide the RBI with necessary supervisory comfort. Thus the BCSBI implicitly draws its powers from the RBI, while functioning as an independent and autonomous body. Through evaluation and oversight of the observance of the Code by banks BCSBI aims to bring about a fundamental change in the existing systems in banks. Although the BCSBI has the powers of issuing sanctions ranging from the issue of reprimands to public censure against banks not complying with their own commitments to customers, the BCSBI’s approach is to adopt a collaborative and consultative approach towards rectification of systems rather than through penal action.

In the ultimate analysis, internationally, rules, regulations and legislations exist for the protection of consumers of financial services and yet there is no dearth of evidence of banks flouting these with impunity. Let us be clear that responsible lending by itself cannot come through any further regulation of either banks or the recovery agents. While Central banks should not retract from the path of deregulation, banks must tread this path with social responsibility. Together with deregulation what is needed is tighter on-site supervision and off-site monitoring coupled with stiff exemplary action against the errant banks. It is recognized that powers of imposing penalties, public censures etc. have little or no impact in an age where public memory is short-lived and bank pockets are deep. Therefore, if central banks are really serious about their responsibilities of improving access to financial services so that the financial system can serve the community at large, then, any disregard by banks of rules and regulations should be judged by central banks as a reflection on the “fit and proper” criteria of the corporate governance of such banks. Exemplary action taken by a central bank in this direction may do more for consumer protection than a hundred consumer awareness programmes.

Big and powerful economic players in the system can and do protect their own interests vis-à-vis the financial system. It is the small and poor who are vulnerable who need to be protected. Responsible borrowing is as essential as responsible lending as both activities are at the cost of public funds of which bankers are mere trustees. The BCSBI, therefore, has a useful role in bringing about a change in the fundamental mind set of players, both banks and individual customers and small businesses. The task is difficult but is made possible with the support of both the central bank and the banks.

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