If RBI means what it says, ‘happy days are here again’ for bank customers!

During his first bi-monthly monetary policy statement, Dr Raghuram Rajan, governor of Reserve Bank of India (RBI) made a far reaching and impact creating statement. If implemented in true letter and spirit, this will change the rules of banking for bank customers, who for long have been the most harassed group in our country.

Coming as it does as a refreshing change from the new governor, Rajan said that consumer protection has to be an integral part of financial inclusion and that the RBI would frame comprehensive consumer protection guidelines based on both domestic experience and global best practices. "Banks should also not take undue advantage of customer difficulty or inattention," he added.

In fact, the RBI should go a step further and ensure that banks should also not take advantage of customer ignorance and helplessness as well.

Here are some of the steps proposed by RBI:

RBI asked banks not to levy penal charges on customers who do not maintain minimum balance in basic savings bank accounts. Rajan, however, said that banks, instead of levying penal charges for non-maintenance of minimum balance in ordinary savings bank accounts, banks should limit services available on such accounts to those available to basic savings bank deposit accounts and restore the services when the balances improve to the minimum required level.

Further, RBI said that banks should not levy penal charges for non-maintenance of minimum balances in any inoperative account. It is not unusual that many account holders found that the balances in their inoperative accounts got evaporated over a period of time as many banks deduct a penalty every quarter for not maintaining stipulated minimum balance. This is a great relief for the common man as it was nothing short of a day-light robbery.

RBI also said that in the interest of their customers, banks should consider allowing their borrowers the possibility of prepaying floating rate term loans without any penalty. RBI has already prohibited charging of penalty for prepayment of housing loans of individual customers, and it now wants to extend the same benefit to all type of floating rate term loans, which will help small and medium enterprises as well.

But the most significant step taken by RBI is to ask banks to limit the liability of customers in electronic banking transactions in cases where banks are not able to prove customer negligence. In these days of hacking and phishing of internet which is of common occurrence, bank customers are an easy prey and any amount of security features are inadequate to protect the bank customers. RBI should, therefore, not simply limit the liability, but make it a zero liability, unless banks can prove customer negligence. This initiative will not only be a boon to bank customers who prefer to avail electronic banking services, but will be a great marketing tool for banks to promote internet banking, which will considerably reduce their operating costs and capital outlay on brick and mortar branches while giving a boost to their deposit mobilization efforts. It is, therefore, a win-win situation for both and is highly commendable.

Much more requires to the done for consumer protection:

In addition to what is proposed by RBI as mentioned above, a lot more requires to be done to improve the trust and confidence of public in banking institutions in our country. Here are a few more steps required to be taken to make banking less cumbersome, more peaceful and most importantly affordable and acceptable to the common man and women of our country, where more than one fourth of the population is outside the ambit of banking today.

1. There is a need to do away with the penalty levied on premature withdrawal of bank deposits, which is not only irksome but also unethical. A depositor withdraws his deposits before the due date only under compelling circumstances and to penalize him for withdrawing his own money is akin to punishing him twice, as he gets only a lower rate of interest applicable for the period of deposit actually run and not at the stipulated rate. And to further levy a penalty of one percent would be adding insult to injury. This should therefore, be done away with.

2. Now that all the banks are on core banking solution, all bank customers should be given the freedom to operate their accounts through any branch of the bank and get all banking facilities anywhere in the country without any additional cost. The distinction between home branch and host branch should be removed and intersol charges presently levied by many banks while dealing with non-home branches should be totally withdrawn, as it has only hindered the optimum utilization of technology and created artificial barriers in spreading banking habits among less literate people.

3. The most obnoxious part of the bank deposits is the tax deducted at source (TDS) on bank deposits which causes considerable pain and anxiety to bank depositors. Despite all the guidelines of RBI, a large number of banks do not issue TDS certificates to depositors with out asking, and many times, they continue to deduct tax even where appropriate forms like 15G or 15H have been filed with the bank. RBI should find a way out of this rigmarole by getting the entire TDS system scrapped for bank deposits by making interest on bank deposits totally tax free at the hands of at least individual depositors, as a large number of senior citizens who depend on bank interest for their lively-hood suffer in silence. This can easily be done on the lines of tax free dividends received from companies, which has benefited a large number of investors in the stock market. While capital market reforms have taken precedence over banking reforms so far, there is a need to hasten the process of banking reforms too and today the banking regulator could do much more to promote banking among common people and make their life easy and peaceful. In fact, this single step of removing bank interest from the income tax tangle will result in metamorphosis in our banking and create an environment of trust and confidence in the banking institutions, which will also be the biggest beneficiaries when interest earned on bank deposits is out of the tax net.

4. The wealth management services rendered by banks today is the biggest hoax played on the hapless bank customers, and series of incidents of mis-selling and heavy losses suffered by customers across the banking spectrum brought out by Moneylife, in a series of real life stories, are a live examples of how banks cheat gullible customers and play havoc in their lives. RBI should, in all fairness, work out penal provisions against all banks who mislead and mis-sell products and these penalties should be a strong deterrent against all such malpractices, which are rampant today. Even where with the strenuous efforts of Moneylife and their team, the victims have been able to resurrect a part of their loss, as per the existing regulations there is no provision for compensation payable for such misdeeds, resulting in recalcitrant banks going scot-free. It is therefore, absolutely necessary that RBI should put in place a suitable and appropriate compensation policy wherever banks fail in their fiduciary duty towards their customers.

5. The banking ombudsman scheme too leaves much to be desired. Though this is much better than many other schemes of this nature prevalent in other sectors of our economy, the banking ombudsman scheme requires an overhaul for the simple reason that during the last three years on an average nearly 50% of customer complaints have been rejected by the office of the Ombudsman for one reason or other. This obviously reflects on the drawbacks existing in the scheme, as any complaint is the result of dissatisfaction on the part of the bank customers, and to treat such large number of complaints as not maintainable is symptomatic of the lacunae in the scheme rather than the frivolous nature of complaints. A thorough review with the objective of making banking ombudsman scheme most efficient and quick grievance redressal mechanism will go a long way in taking banking to new heights, more so when several private sector players are likely to see the light of the day when they get banking licence shortly.

These are only illustrative and not exhaustive suggestions for the RBI to ponder over and work out comprehensive consumer protection regulations, which can play an important role in considerably improving the banking system comprising of responsible, reliable and consumer friendly banking institutions, who can be trusted and relied upon by the billion people for the greater good of our country.

(The author is banking analyst and he writes for Moneylife under the pen name 'Gurpur')