Photo: Mint
Photo: Mint

Opinion: Reserve Bank’s ‘independence’ costs you money

RBI has not understood its role as a protector of bank consumers

The average drawing room conversation on the government encroaching on the independence of the RBI tut-tuts over the good guys at the Reserve Bank of India (RBI) getting stamped on by a bully government. Now, the resignation of Urjit Patel has added fuel to the views fire. But I wonder if the conversation would change if the same groups realized what this ‘independence’ or its obverse, the lack of accountability, means to their money. Last week, the RBI announced that new floating rate home loans from banks would be benchmarked to a rate not controlled by banks from April 1 2019. Anybody who has taken a floating rate loan in India knows that as the interest rate cycle goes up, loan rates mostly go up very quickly, but the opposite does not happen. This is not a new problem. I remember flagging the issue more than 15 years ago. It is not as if the RBI has not been aware of the problem of benchmark fixing by banks to cheat retail home loan borrowers. RBI has changed the way the rate is calculated four times in the past 24 years to make it difficult for banks to fix the rate—starting with the Prime Lending Rate (PLR) in 1994 to the Marginal Cost of Funds lending Rate (MCLR) in 2016. But in each case the power to calculate and fix the rate remained with the banks. A power they have mis-used freely at your expense. An internal RBI committee found that banks fixed rates at will.

What does the independence debate have to do with the way home loans benchmarks are fixed? Plenty. RBI has consistently given a long rope to banks and has not understood its role as a protector of bank consumers. Let me give just two examples. Did you know that till 2010 the way the savings bank deposit rate was calculated was loaded against you? You were paid interest on the lowest balance between the 10th to the end of the month. So, even though your average balance in the month may have been higher, if on any one day your balance dipped to zero, you got no interest. It took till 2010 for this formula to change. You can read about this here.

Two, a mystery shopping exercise by economist Renuka Sane and I, found that bank managers were lying about products, features and costs most of the time when selling mutual funds and insurance products. You can read the paper here. We presented the findings to the then governor, and post the meeting a few people from the vigilance department told us that the problem was deeper and wider than what our paper documented, especially in small towns. What action did RBI take to stop this cheating? None. Bank branches continue to mis-sell.

RBI has interpreted consumer protection as preventing bank failure only. For everything else it hides behind its mantle of being ‘independent’ to avoid being subject to even basic appellate authorities. The capital market, pension and insurance regulators’ decisions can be appealed to the Securities Appellate Tribunal. No such body exists for the RBI. We must look at the independence of the RBI in the context of its role as the keeper of monetary policy independent of the government. But this lack of accountability for its role in not protecting consumers is just wrong.

The rise of consumer activism is taking root in India. A column by Debashis Basu, Editor moneylife.in in the Business Standard says that RBI has responded finally on the benchmark issue due to Moneylife Foundation’s Public Interest Litigation (PIL) in Supreme Court for relief against a regulator that does not act in the interest of retail customers. The PIL has rightly asked for a clawback of overcharged interest. You can read the story here. Maybe the courts will intervene to fix accountability on the central bank in its avatar as a regulator of banks. 

What you should do while these events play out? One, understand that the RBI must have oversight and accountability on its role as a regulator of banks that sell you products and services. Two, wait for the new benchmark regime to come into play. Keep reading this space and we will tell you how to switch your old loan to a new loan. If you are with a housing finance firm or an NBFC, do consider this a time to switch to a bank with a better third party benchmark in place.

Monika Halan is Consulting Editor at Mint and writes on household finance, policy and regulation.

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