Shyamal Banerjee/Mint
Shyamal Banerjee/Mint

RBI takes the first step towards customer protection

The draft charter, however, falls short of giving a road map of implementation

It took 10 years but it has finally happened. On 22 August, the Reserve Bank of India (RBI) released a draft charter of customer rights (http://goo.gl/clycrO) that enumerates and explains a set of five customer rights. These are: Right to fair treatment; right to transparency, fair and honest dealing; right to suitability; right to privacy; right to grievance redress and compensation. What I like about the draft is that it is finally out after much delay. I don’t think we need to stress the point that bank branches are now the places where a customer goes to get trapped into toxic financial products. The draft is important because in it RBI formally accepts that the sale of third-party products (not the ones manufactured by banks but others such as mutual funds, insurance and car loans) comes under its regulatory umbrella. My fight with RBI for a decade has been the unforgivable attitude of “not-my-problem". It has actually been said to me: this is not our problem; the other regulators need to deal with it. But with this draft, third-party product sale, advice and due diligence is firmly the bank’s responsibility.

I see the draft as a step in the right direction, but I find that it falls short of giving a road map of implementation, leaving it to the interpretation of each bank. Banks are known to tick boxes set before them by RBI and smirk offline at having had the regulator. RBI will have to show intent to put teeth into these regulations before this makes any impact on the ground. But there is enough in the draft, if taken forward, to totally change the way financial products and services are thought about in banks.

I would easily identify the right to suitability as the core of this draft. Suitability is the appropriateness of the financial product to the needs of the customer “based on an assessment of the customer’s financial circumstances and understanding". Or, not selling a regular premium life insurance to an income seeking retired person with no dependants. I call this the heart of the draft because a careful reading gives you a sense of the intent of the authors of this draft. And if that is implemented, banks are in a “seller beware" world. I understand three things from this paragraph. One, the board of the bank must get involved in the construction of the suitability criterion. This is the thread that, if pulled hard enough, will make bank boards responsible for mis-selling at branches. Two, there will be a list of products that are over-the-counter (OTC) that the bank will sell to anybody who asks for them. These products include a savings deposit, a current account, crop insurance for agriculture loans, and “other products identified from time to time". The rest will need the “necessary due diligence" before sale. This means that, other than a set of notified products, all others need advice and due diligence on the part of the bank before sale. Or, there is a set of OTC products and there is a set of advised products. Or, the distinction between seller and adviser must be established. Three, this advice will be charged for by the bank because the bank is allowed to charge a “reasonable fee/service charge" for ensuring suitability. Or, for giving advice.

RBI must realize that unless the bank management and board are made responsible for mis-selling, there will be no systemic change in a bank branch’s behaviour. While it is easy to vent at the relationship manager because she is the face that cheats you, the daily, weekly, monthly targets are set by the branch manager. Who gets his branch targets from the city head office, who gets it from the regional manager, who gets it from the retail head. Whose bonus depends on the bottom-line. His target is fixed by the chief executive officer. Who then reports to the board. The board questions him on performance slippage and missing the Q-se-Q-tak target. Should the board question him on customer protection, the chain will simply carry the message back down.

Why hide “seller beware" in this manner? Banks are a powerful lobby and use their ultimate threat of bank failure to push back hard. The banking staff is unionized and can be pushed to resist this. Don’t believe me? Wait and see the response of banks. The draft will be called “unpractical" and “difficult to implement" and the Indian Banks’ Association, the industry lobby group, will dub it anti-national. Wait and see!

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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