The Reserve Bank of India (RBI) is slowly waking up to public anger about rising bank charges, rampant mis-selling of financial products, growing incidents of digital and cyber fraud and poor grievance redress. Customers are especially angry that banks are never penalised and compensation for harassment is very rare. Yet, RBI has responded merely with an expansion of the role of the banking ombudsman (BO) from 1st July. Under the amended scheme, the BO’s pecuniary jurisdiction has doubled from Rs10 lakh to Rs20 lakh. It is also allowed to pay a compensation of up to Rs1 lakh for harassment, mental anguish, loss of time and expenses. RBI has widened the scope of filing an appeal against the BO’s orders.
Unfortunately, this is like applying band-aid to a huge bleeding wound. It starts with RBI’s refusal to even acknowledge the problem or rampant mis-selling and unfair charges. RBI’s press release describes it as “deficiencies arising out of the sale” of mutual funds, insurance, third-party investment products and “non-adherence to RBI instructions with regard to mobile banking and electronic banking services.” As always, the media has lauded this as a step forward; but it is highly inadequate and incomplete. In fact, we would like to know why RBI has been dodging a far simpler solution for nearly three years.
Let us examine why this is too little. First, there was no need to expand the role of the BO, because taking up issues with it is always onerous and, often, fruitless. The BO will only take up a complaint if a consumer has first taken up the issue with the bank branch, escalated it to the grievance redress cell and has not received a satisfactory response even after 30 days. This is time-consuming and depositors are often led on by false assurances from bank officials. If the complaint is time-barred, the BO can again refuse to accept it. Finally, we have come across several reports of the BO closing cases by accepting the bank’s viewpoint, making no attempt to engage with the victim.
We see no evidence of RBI having studied the efficacy of BOs in recent times or having analysed the over 100,000+ complaints that it received in FY15-16 (especially those that are rejected), while framing the new regulation. The numbers are worrisome. Only half the total complaints received in the year were ‘maintainable’ and even out of these, a whopping 31,900 were rejected. Effectively, only 18% were redressed through mutual consent, while a princely 18 received compensation.
Instead of expanding the role of the BO, the Charter of Consumer Rights that the RBI issued in December 2014 should have provided a better, faster, and more comprehensive redress. But RBI needs to give it teeth by fixing costs and penalties for breaching the five basic consumer rights that it identified, namely, right to fair treatment; right to transparency; fair and honest dealing; right to suitability; right to privacy; and right to grievance redress and compensation.
Secondly, the increase in pecuniary jurisdiction for the BO is far too little. Cases of mis-selling of insurance products or problems relating to third-party wealth management products are usually for amounts far in excess of Rs20 lakh. The most egregious of these is mis-selling of insurance. Here’s what a Moneylife survey of over 1,100 respondents in May 2015 showed. Over 83% said they were coerced into buying insurance and 68% said this was especially done while negotiating loans. Realistically, to make the BO useful for the consumer, the pecuniary jurisdiction of the BO should have been raised to Rs1 crore, so that issues above this could go straight to the National Consumer Disputes Redressal Commission—the apex consumer court.
Thirdly, not all cases of downright cheating or ‘deficiency’ on the part of banks relate to one single transaction. Consider this. A dubious relationship manager of ICICI Bank’s Pune branch systematically ripped off a number of senior citizens by conning them into buying multiple, single-premium insurance policies as a succession planning exercise where the beneficiaries were the children and grandchildren. In one case, 12 policies sold to an 80-year-old totalled over Rs62 lakh. His brother, 84, was sold several policies adding to over Rs1 crore. An 86-year-old had his signature forged in policy documents. A 77-year-old doctor was sold a single-premium policy of Rs70 lakh and learnt that she was conned; she needed to make another five instalments of Rs70 lakh or lose everything. The Bank is conducting an inquiry and has paid back two of the victims after Moneylife’s intervention.
The new pecuniary limits of the BO do not help such victims. It is not clear if they would have to file separate complaints for each instance of cheating or if the 77-year-old doctor’s plea would be entertained. In such cases, the BO should have been allowed to consolidate the cases, even if it breached the pecuniary limits substantially, and considered some on sympathetic grounds. Instead of this confusion, if the Consumer Charter were made effective, ICICI Bank would have had to refund all the victims based on a simple complaint and would have had to compensate them for hardship under the right to compensation. Isn’t this a far better solution? Cases of organised mis-selling like these are a fit case for punishing the bank (as has happened in most of the better-regulated countries) for failing to monitor sales executives, or worse.
In fact, the Consumer Charter would have covered all issues now under the BO’s expanded remit, such as poor grievance redress in case of ATMs failing to dispense cash, multiple debits for ATM and point of sale transactions, fraud involving misuse of credit/debit cards, cloned cards, etc., wrong billing, incorrect charges and fees, delay/failure in fund transfer, unauthorised electronic payments, wrong reporting to credit bureaus and failure to observe RBI guidelines on use of recovery agents. It could also have offered faster and better redress if it were monitored effectively; but that is probably why banks have managed to get RBI to bury the Consumer Charter.
The new BO regulations cover issues such as ‘suitability’ or otherwise of products sold and improper or unsuitable sale of third-party products. This requires application of mind and a proper hearing that allows both sides to make their case. It is not clear if RBI officials appointed as BOs have either the knowledge or the skill to fulfil the greater quasi-judicial responsibility given to them.
What about Compensation?
The BO can compensate consumers for the cost, hardship and mental agony suffered due to the negligence of banks. But, by limiting the compensation to a niggardly Rs1 lakh, irrespective of the circumstances of the case or extent of harassment, RBI shows callous disregard for consumers even five years after better-regulated countries have changed. Contrast this with the UK where banks have paid out £26.9 billion, so far, to compensate victims of the payment protection insurance scandal. These include Barclays, Lloyds Banking group, HSBC and RBS. In 2013, the Financial Conduct Authority of the UK forced HSBC to compensate customers after a ‘mystery shopping’ exercise by its investigators revealed mis-selling of investment products.
We don’t know when RBI will be under enough pressure from policy-makers or its own public directors (such as Bharat Doshi, N Chandrasekaran, S Mankad, Dr Rajiv Kumar, Ashok Gulati or Manish Sabharwal) to step out of RBI’s ivory tower, understand consumer issues and initiate strong corrective action. It will happen only if people keep up the pressure and signal to the government that they will not allow themselves to be fleeced anymore.