Home / Opinion / The Indian Banks’ Association is shockingly anti-consumer

Even if you are a hard-bitten old journo, some things still have the capacity to shock. The audacity of an industry lobby that keeps pushing for corporate profitability, even if it is at the cost of fairness, transparency and consumer rights, isn’t news anymore. But the latest statement by the banking lobby, the Indian Banks’ Association (IBA), has taken this attitude to a new level. More of that later. First, read the following IBA statements over the years in reaction to changes that would rectify the unfair deal that bank consumers got, to see why I look at the IBA’s stance with a mixture of disbelief and distaste.

“We requested them to either reduce the savings rate or postpone the implementation. It will affect our margins and profit" said IBA chairman in February 2010 when the Reserve Bank of India (RBI) finally changed the formula to calculate interest on savings deposits. Till 1 April 2010, bank deposits earned interest on the lowest balance in the account between the 11th and 30th of a month. So, if your monthly average balance was 5 lakh and you went to zero for one day between the 11th and 30th of the month, you got zero interest. The fact that it took 10 years since the debate was initiated to change the formula speaks of the banking lobby’s power. But to brazenly say that it will affect “our profits" takes this to a whole new level.

“It is the view of our members that it is not an appropriate time to deregulate the savings rate because of the upward bias in the interest rates currently and the general high rate scenario." This is the IBA chief executive officer in July 2011, reacting to RBI’s proposal of deregulating interest rates on savings deposits. Lending rates of banks were deregulated in the early 1990s and fixed deposit rates in 1997, but the savings deposit rate had been fixed by the RBI. It stood at a tiny 3.5% since 2003, got hiked to 4% in May 2011, and was finally deregulated in October 2011. Some banks now offer a savings deposit rate of 7%. But the way, the bank lobby fought to keep giving savers minimal return and the time it took the RBI to do this speaks of IBA’s successful lobbying might. Bank consumers are not a unified entity and are unable to fight back.

“The commission under the Bancassurance model is 35% of the premium mobilized whereas under the broking model the commission is pegged at 30%. The banks will find it difficult to breakeven in the broking business model—with reduced commission on one hand and increased expenditure on the setup on the other hand. With the activity turning less remunerative, the banks may not expand the insurance selling network and consequently the goal of higher insurance penetration may suffer." This is an excerpt from IBA minutes in December 2013 responding to a finance ministry circular asking public sector banks to become insurance brokers. The minutes go on to add: “As stated above in the proposed broking model, the responsibility for the insurance product sold would shift from the Insurance Company to the brokers. The resultant fiduciary responsibility on the banks would worsen their risk profile." The subtext indicates two things. One, if you do this, insurance penetration will suffer. The threat is the reduction in captive money that the government has from the insurance industry to buy government securities. Two, banks will get risky. Or, the ultimate threat from IBA: ‘we’ll roll over and fail and then you guys will have a problem’. No government or regulator can deal with bank failure and IBA has used this over the years to push back consumer centric reforms.

The latest to cause disbelief is the IBA statement on putting the onus of deciding the suitability of a financial product to low-income households—a category that needs the highest levels of protection. According to a Mint story (read it here: http://goo.gl/JJj90O ), IBA wants low-income households to ensure that products are suitable for them, and says that banks have operational issues in doing this and cannot be held responsible for selling ‘suitable’ products. This was in response to the Nachiket Mor Committee report that wants banks to move to a ‘seller-beware world’ from the current ‘buyer-beware’ one. The world has worked with ‘suitability’ of products as a baseline hygiene factor in consumer protection for decades. This totally escapes IBA. Could it be that it is serving its mandate and being true to its objectives in maximizing bank profitability?

I read through the objectives of IBA (http://www.iba.org.in/Objects.asp) and though I found organizing indoor and outdoor games… by “purchasing, acquiring, taking on lease, own, hire or otherwise playing fields, grounds, buildings, pavilions and other facilities" as one of the objectives, I did not find increasing profits at any cost anywhere. Maybe it is an unsaid that only bankers can understand.

From what I understand, all parts of the regulatory and policy system are committed to better consumer protection. Maybe it’s time that IBA understood which way the wind blows. Dinosaurs habitually get extinct.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, Yale World Fellow 2011 and on the board of FPSB India. She can be reached at expenseaccount@livemint.com

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