Home / Opinion / Dr Rajan, will RBI look after consumer protection finally?
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Reserve Bank of India (RBI) governor Raghuram Rajan presented his second credit policy on Tuesday, 29 October 2013. While most of the attention is on the macro part that deals with rising interest rates and such like, I was more keen to read in detail an item much lower down in the statement (you can read the second quarter review of 2013-14 here: http://goo.gl/dbLraB ). Tucked away under item V, point 43 says: “It is proposed to implement the following recommendations of the *FSLRC pertaining to consumer protection and capacity building:

1) All instructions relating to consumer services/consumer protection would be consolidated and will be placed on the Reserve Bank’s website as a single group of instructions by end-March 2014 and they will be examined for gaps, if any.

2) A Committee will be set up by the Reserve Bank to examine capacity building, including basic and job specific knowledge requirements and examine whether a system of formal certification is warranted for certain job descriptions within the Reserve Bank and in the financial entities and market segments regulated by it.

3) The Reserve Bank will examine its own public facing services and institute time-bound response guidelines where feasible and not already in place. Such guidelines will be placed on the Reserve Bank’s website by January 2014."

*(FSLRC stands for the Financial Sector Legislative Reforms Commission)

It’s good to see that Rajan is talking about skill upgradation and certification of the RBI staff and of the entities RBI regulates. But he needs to go much further than just consolidating instructions, getting bankers certified and issuing fresh guidelines. There is an urgent need to see the rot in the bank branches and the harm that toxic retail financial products are doing to households that have been tricked into investing in them by their bankers.

What evidence do we have? No data, just anecdotal stories. Here’s a story a senior economist within a bank told to me some years back. We’ll not take names. When the second-year premium debit request came from his bank in his hometown, where he has a joint account with his mother, he tried to recollect when he had paid the first. He pulled at the thread hard enough to find that the first premium was debited after his signatures were forged in the local branch. Because of who he is, the insurance company refunded the first premium. And knowing what happens to whistle-blowers in India, Dr Economist preferred to carry on with his job rather than complain to the chief executive officer of the bank. The stories are many. Of lockers being denied unless an insurance policy is bought. Of Public Provident Fund accounts not being opened and an insurance policy being pitched instead. Of trying to buy a mutual fund and being sold an insurance policy. Of thinking you are investing in a fixed deposit but finding out a year later that you are sitting on a toxic life insurance product. Of having your mutual fund portfolio churned regularly to milk it for the upfronts that the funds offer. Bank branches are selling products that add to their income at the cost of the financial well-being of their own customers. And if this means that they have to lie and cheat—so be it.

To turn these stories into evidence, RBI needs to first stop being in denial. All attempts to alert RBI in the last seven years have run into the “it-is-not-my-problem" wall. It has been RBI’s considered view that mis-selling by bank staff is the problem of the product regulators and not of RBI. This is like a hospital blaming the pharma company for the medicine when it is the doctor who prescribed the wrong drug and harmed the patient. The medicine was not harmful, but was “unsuitable" for the disease the patient had. Much like an artist with irregular income wanting a fixed deposit for a lump sum she had, being sold a 15-year annual premium life policy by a bank that is always awake.

So, why don’t people complain? Oh, they do. The answer from the consumer courts and the ombudsman is a derivative of the disclosure and financial literacy regime that Indian financial markets function in. That is, if disclosures are made, then the buyer needs to beware. The push back from banks and insurance companies and the courts is this: you signed the policy document, you knew what you were buying, where is the “mis-selling" or fraud? Apart from the fact that you need a degree in law and finance to decode what the policy document finally says, isn’t there a problem with a commission earning agent selling a product that he is not responsible for?

There is an urgent need to rework this head-in-the-sand attitude of RBI. First, RBI needs to conduct a mystery shopping exercise to find out what is actually happening inside bank branches and then fine banks so that it hurts. British banks will finally pay out a total of £20 billion in compensation to those who were mis-sold one insurance product. Or RBI can take a short cut. Make the bank boards responsible for mis-selling of financial products. See how quickly the message is sent down the line that cheating people is not what bankers are supposed to do. I still believe that bank branches are the best vehicle for the mass outreach of retail finance including insurance and mutual funds.

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

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