The base rate system proposed by the Reserve Bank of India (RBI) is still to get implemented. K.J. Udeshi, chairman, the Banking Codes and Standards Board of India (BCSBI), talks to us about what it means, apart from discussing issues of transparency and mis-selling in the banking industry and what consumers need to do. Edited excerpts:
It’s been four years since the code came into effect in July 2006. It was revised in August 2009. In this period, what has been its biggest achievement and failure?
Our biggest achievement is that we have framed two codes, which enshrine the rights of the common man and micro and small enterprises. We have given rights to those who are at the bottom of the pyramid. If someone wants a banking service, he doesn’t need to know someone in the bank.
I would like to mention one more. In the banking sector, nobody has ever asked for compensation before. BCSBI introduced the concept of compensation and we have seen to it that our members evolve policies and put these on the website. Most important policies are cheque collection, grievance redressal, collection of dues and repossession of securities and compensation policies. Banks had never framed policies on these subjects and these were never made public.
As far as failures go, I would say we have encountered none. Our work is an ongoing process. There may be gaps but we are improving banking services for customers.
Existing home loan borrowers on floating rates see the rates rise, but not fall. Will the base rate system change this unfair game? Will it be fairer than the benchmark prime lending rate (BPLR)? Or, will it just increase transparency in terms of how the rate is fixed?
As the regulation stands today, banks are supposed to link floating interest rates to an external rate or a market-based rupee interest rate and not any internal rate. So, it is not supposed to be linked to the base rate or PLR. Let’s be clear about this fact.
Also, base rate has still not come into effect and guidelines are being processed, so it’s still early to say anything at this stage. One good thing is that now banks cannot lend below the base rate. This makes it transparent because you know that nobody is getting a loan at a rate less than the base rate.
New focus: BCSBI chairman K.J. Udeshi says customers should be aware of their rights and ask questions. Ashesh Shah/Mint
As far as the issue of change in floating rates goes, customers should beware the minimum interest rate clause in their terms and conditions. Some banks insert this clause. Say, the clause specifies the rate at 9% and your floating rate is supposed to be 2% above that rate. So, your floating rate today would be 11%. Now, the clause in the loan document says that your rate will be 2 % above 9%, provided that it will never go below 11%. This means that your interest rate may rise, but never fall.
So, customers should beware, they should read the terms and conditions. They should know whether there is a minimum interest rate clause inserted and if they are not comfortable they should not accept such terms.
We want banks to be transparent and tell the customer upfront what the interest rate is going to be. Having done that, if the customer still wants the loan, then who is to be blamed?
Customers are given the terms and conditions. Generally it’s three-four pages of fine print, so nobody reads it. Those who go for the loan are desperate for the loan and, therefore, they accept whatever they are told.
It’s a different matter that we may take up this issue, saying that its not fair to put a minimum interest rate clause. We will see what we can do about it.
Why has it taken RBI 10 years to say that old home loan customers should get the same rates?
I would not like to comment on that.
Today, banks have emerged as a one-stop shop for distribution of financial products. Mis-selling is prevalent in the market and banks are no exception. How would you address this through the code?
Banks mis-selling products means that they are not explaining the terms and conditions properly. But what are customers doing? Are the customers so gullible that they will accept what the banker tells them? Shouldn’t they ask for written terms and conditions? Shouldn’t they ask for a written proof for the promises?
There have been instances where the product is not explained to the customer or the customer doesn’t necessarily understand it.
Then the customer should not buy it. Sometimes customer gets swayed by promises of high returns. He should be very careful and he should be seeing the terms and conditions. And he should be asking questions that bother him before he invests. The customer also has an obligation.
Yes, but what if the bank is mis-selling a product that is not supposed to be sold in a particular way?
I don’t think that is so. It is only that, perhaps, the customers do not raise questions. So, bankers manage to sell a product, which if they (the customer) had asked for more information, they wouldn’t have bought. We haven’t received complaints regarding this issue. Once we do, we would take it up.
It’s been observed that even now, many private sector and foreign banks do not mention applicable interest rates on retail loans on their websites. Your views.
Yes, there are some foreign and private sector banks, which have not mentioned information on their websites.
It’s a regulatory requirement, which means it is a part of the code also. We will take this up.
Do you think BCSBI needs more teeth?
No, certainly not. We must understand that BCSBI has been set up through voluntary membership of banks and we work in cooperation and collaboration with banks. And we find that that helps. BCSBI seeks to bring a healthy pressure on these banks.
Using a whip never works. If it did, then the RBI wouldn’t have set up BCSBI. The RBI could have penalized all the banks. I am not saying that penalties don’t work. It’s not a deterrent. You should bring about a change in the system, which should come from within (the banking industry). For that, you don’t require penalties.
In the last four years, we are pouring something in the banking sector. I can say it is half full, you may say it is half empty. It’s a question of perception. But at the same time you have to admit that a lot of improvements have come about. Whether it’s the credit card issue, transparency issue or depositors’ issue. The pace may be considered slow, but it is working.
BCSBI recently launched credit counselling. How has the response been? Are any specific banks not abiding with the code as far as collection of dues goes?
The response has been very good. Unfortunately, it is restricted to Maharashtra. So, we need to (expand) our base, it’s in the pipeline. On the issue of collection of dues, I have seen a lot of improvement. There are no specific banks as such.
Don’t you think banks have been irresponsible in giving credit?
Yes, there are banks that have been at fault, but all this is past. As per the code, banks can no longer send unsolicited credit cards.
The knowledge about the code among retail customers is low. How do you plan to change that?
The RBI has spent about Rs4 crore to publish the code in 14 languages and 80 newspapers across India. This means that it would have reached at least 40,000,000 people. We have about 450,000,000 literate adult population. Even the Indian Banking Association printed and distributed around 50,000,000 of copies of the code. So, we can say that one-fourth of the adult population has already been reached. So why do we still feel that the knowledge of the code is low. (Perhaps), because, those who have seen it, (may) not have read it. It’s like taking a horse to the water but you can’t make it drink. If you don’t read the code, you are not aware of your rights. If you are not aware of your rights, you can’t fight for them. We want to focus on awareness and credit counselling.