Shyamala Gopinath: Banks' relationship with customers - evolving
perspectives
Address by Ms Shyamala Gopinath, Deputy Governor of the Reserve Bank of India, at the
4th M R Pai Memorial Award Function, organised by the All India Depositors' Association,
Mumbai, 8 April 2008.
* * *
I feel it a privilege to be associated with today's function as a tribute to the late Mr. M.R.Pai,
the doyen of consumer activism in India. He successfully championed the cause of
consumers, particularly bank depositors, during a different economic setting when the
institutional dynamics were different, particularly for the public sector, and customer as a
generic entity had not acquired the high pedestal in public discourses and management
meetings. Times have changed. But as a Sanskrit saying goes...kadachit anidrishyam jagat.
The world has always been the same and consumer issues in the new economic order
remain as pressing as ever, even more so. Even in developed countries issues relating to
customer protection and financial inclusion are finding increasing focus. There is as much
need for a Mr. Pai today, as it was then in putting across consumer issues to the fore in an
effective manner.
In my address today, I intend to share my perspective on the evolving nature of banks'
relationship with its individual customers and the new challenges in this regard. The role of
banks in intermediation of financial needs of different classes of customers has undergone
significant changes. For the sake of convenience, banks' various roles vis-à-vis their
customers can be broadly categorized as (i) acceptors of deposits (ii) credit providers
(ii) providers of payments and remittances services (iv) provider of foreign exchange services
(v) facilitators in circulation of currency notes/coins; and (vi) providers of financial
instruments.
One of the defining features of the process of reforms initiated in the early nineties was the
deregulation of interest rates. On the deposit side, interest rates on all deposits, except
savings accounts, have been de-regulated. Similarly, on the bank lending, rates to be
charged by the banks on most of the credit facilities have been deregulated except a small
component for lending related to certain segments. Simultaneously, in 1993, as per the new
licensing policy, fresh licenses were issued to a few private sector banks with the objective of
enhancing the level of competition in the sector. One of the expected outcomes of this policy
was expanding the reach of banking services, both in qualitative and quantitative terms.
Technology emerged as the backbone of banking operations, revolutionizing service delivery
through new platforms and channels. But it became evident gradually, these developments
created more challenges for the customer in terms of service quality, non-human interface,
unsolicited marketing of products, ever-increasing fine-prints on documents etc. all of which
got compounded on account of basic financial unawareness on part of the ordinary
customer.
Self regulation by the banking industry would have been the ideal redressal for the emerging
challenges. But due to heterogeneous and complex nature of the problems coming to light,
some regulatory initiative had become necessary. In the mid term review of the Monetary
and Credit Policy 2003-2004, it was decided to review the level of public service provided by
the Reserve Bank and banks, and to evolve appropriate incentives to facilitate change on an
ongoing basis. Accordingly, the Committee on Procedures and Performance Audit on Public
Services was set up. The Committee focused on the inadequacy in banking services
available to common person and looked into the need to (i) benchmark the current level of
service, (ii) review the progress periodically, (iii) enhance the timeliness and quality, (iv)
rationalize the processes taking into account technological developments, and (v) suggest
appropriate incentives to facilitate change on an ongoing basis. Following the Committee's
recommendations, various important customer service regulations were issued, notable
among them being the guidelines on facilitating the payment to survivor/nominee of a
deceased depositor, simplifying the KYC requirements, collection of cheques and facilitating
operations in bank accounts.
Simultaneously, a series of measures was taken to improve the institutional mechanism
within as well as outside the banks to improve the quality of customer service.
•
All the banks were advised to constitute a Customer Service Committee of the
Board with a view to strengthening the corporate governance structure in the
banking system and also to bring about ongoing improvements in the quality of
customer service provided by the banks.
• In order to encourage a formal channel of communication between the customers
and the bank at the branch level, banks were advised to take necessary steps for
strengthening the branch level customer service committees with greater
involvement of customers. Further as senior citizens usually form an important
constituency in banks, banks were advised to preferably include a senior citizen in
the branch level committees.
•
The Banking Ombudsman Scheme was revised to enlarge the scope of the Scheme
to include customer complaints on certain new areas, such as, credit card
complaints, deficiencies in providing the promised services even by banks' sales
agents, levying service charges without prior notice to the customer and non-
adherence to the fair practices code as adopted by individual banks. The Scheme
therefore provides a forum to bank customers to seek redressal of their most
common complaints against banks, including those relating to credit cards, service
charges, promises given by the sales agents of banks, but not kept by banks, as
also, delays in delivery of bank services. The bank customers would be able to
complain about non-payment or any inordinate delay in payments or collection of
cheques towards bills or remittances by banks, as also non-acceptance of small
denomination notes and coins or charging of commission for acceptance of small
denomination notes and coins by banks. The present Scheme also allows appeals
from both banks and complainants against the decisions of Banking Ombudsmen.
•
Recognising an institutional gap in measuring the performance of the banks against
codes and standards based on established best practices, Reserve Bank of India
has taken the initiative in setting up the Banking Codes and Standards Board of
India (BCSBI). It is an autonomous and independent body, adopting the stance of a
self-regulatory organisation in the larger interest of improving the quality of customer
services by the Indian banking system. Banks register themselves with the Board as
its members and provide services as per the agreed standards and codes. The
Board in turn, monitors and assesses the compliance with codes and standards
which the banks have agreed to. The registration of banks with the BCSBI, as
members, enables the Reserve Bank of India to derive greater supervisory comfort,
so also the customers of the member banks. This would also enable the BCSBI to
accommodate the bank-specific differences in the customer service related
benchmarks set by the banks for themselves. As on date, around 71 banks have
joined the BCSBI as members.
I. Deposit accounts
With regard to account holders, it would be useful, to recollect some of the important
incremental measures taken by RBI, which over a period have made significant impact:
•
Banks are required to inform customers upfront about the requirement of minimum
balances and the charges if such balances are not maintained. They are also
required to inform customers one month in advance any changes in such minimum
balances and charges.
• It has been clarified to banks that NRO accounts can be held jointly with residents
•
In case of collection of cheques, banks are required to formulate and disclose their
policy for affording immediate credit, time frame for collection and interest payment
for delayed collection, taking care to ensure that the interests of the small depositors
are fully protected. The policy should clearly lay down the liability of the banks by
way of interest payments due to delays for non-compliance with the standards set
by the banks themselves. Compensation by way of interest payment, where
necessary, should be made without any claim from the customer.
•
Banks are required to provide both the drop box facility and the facility for
acknowledgement of the cheques at the regular collection counters and no branch
should refuse to give an acknowledgement if the customer tenders the cheques at
the counters.
• Banks have been advised to ensure that brief, intelligible particulars are invariably
entered in passbooks/statements of account and they adhere to the prescribed
monthly periodicity while sending statement of accounts.
•
It has been clarified to banks that payment to the survivor/nominee of a deceased
depositor where there is a valid nomination or where the account has been opened
with a survivorship clause is a valid discharge of liability provided inter alia it has
been made clear to the survivor(s)/nominee that he would be receiving the payment
from the bank as a trustee of the legal heirs of the deceased depositor, i.e., such
payment to him shall not affect the right or claim which any person may have
against the survivor(s)/nominee to whom the payment is made. In such cases
insistence on production of legal representation is unwarranted and would, invite
serious supervisory disapproval. In such case, therefore, while making payment to
the survivor(s)/nominee of the deceased depositor, the banks have to desist from
insisting on production of succession certificate, letter of administration or probate,
etc., or obtain any bond of indemnity or surety from the survivor(s)/nominee,
irrespective of the amount standing to the credit of the deceased account holder.
•
In case where the deceased depositor had not made any nomination or for the
accounts other than those styled as "either or survivor" (such as single or jointly
operated accounts), banks have been told to adopt a simplified procedure for
repayment to legal heir(s) of the depositor keeping in view the imperative need to
avoid inconvenience and undue hardship to the common person. In this context,
banks may, keeping in view their risk management systems, fix a minimum
threshold limit, for the balance in the account of the deceased depositors, up to
which claims in respect of the deceased depositors could be settled without insisting
on production of any documentation other than a letter of indemnity.
•
In the case of term deposits, banks are advised to incorporate a clause in the
account opening form itself to the effect that in the event of the death of the
depositor, premature termination of term deposits would be allowed. The conditions
subject to which such premature withdrawal would be permitted may also be
specified in the account opening form. Such premature withdrawal would not attract
any penal charge.
•
In order to avoid hardship to the survivor(s)/nominee of a deposit account, banks are
advised to obtain appropriate agreement/authorization from the survivor(s)/nominee
with regard to the treatment of pipeline flows in the name of the deceased account
holder.
•
Banks are advised to settle the claims in respect of deceased depositors and
release payments to survivor(s)/nominee(s) within a period not exceeding 15 days
from the date of receipt of the claim subject to the production of proof of death of the
depositor and suitable identification of the claim(s), to the bank's satisfaction.
• Information should not be gathered in the name of KYC with the intention of using it
for cross-selling of services. The banks should obtain the information required for
opening an account independent of any other information that they may seek for
cross-selling purposes with the consent of the customer. The forms containing this
information must not be a part of the account opening form.
•
The KYC procedure for opening accounts for those persons who intend to keep
balances not exceeding rupees fifty thousand (Rs. 50,000/-) in all their accounts
taken together and the total credit in all the accounts taken together is not expected
to exceed rupees one lakh (Rs. 1,00,000/-) in a year has been simplified to enable
those belonging to low income groups without documents of identity and proof of
residence to open banks accounts. In such cases banks can take introduction from
an account holder on whom full KYC procedure has been completed and has had
satisfactory transactions with the bank for at least six months. Photograph of the
customer who proposes to open the account and his address need to be certified by
the introducer. Recently, clarification had also been issued to facilitate account
opening by close relatives, e.g. wife, son, daughter and parents etc. who live with
their husband, father/mother and son, as the case may be, who may not have the
utility bills required for address verification in their name.
II. Bank lending
On the lending side, guidelines were issued on Fair Practices Code for Lenders, including
comprehensive details in loan applications and conveying reasons for rejection of loans.
In terms of the guidelines banks/FIs are required to ensure that loan application forms in
respect of priority sector advances up to Rs.2.00 lakhs contains comprehensive information
about the fees/charges and any other matter which affects the interest of the borrower. The
Guidelines were further revised to ensure that all loan applications in respect of all categories
of loans irrespective of the amount of loan sought by the borrower contains comprehensive
information about fees/charges etc.
Banks/FIs are also required to convey in writing, the main reason/reasons which have led to
rejection of the loan applications in case of all categories of loans irrespective of any
threshold limits, including credit card applications.
RBI has issued comprehensive Credit Card Guidelines relating to credit card operations of
banks/NBFCs in November 2005. These guidelines have been issued aimed at encouraging
growth of credit cards in a safe, secure and efficient manner as well as to ensure that the
rules, regulations, standards and practices of the card issuing banks are in alignment with
the best customer practices. These guidelines address issues relating to billing, use of Direct
Selling Agents (DSAs) and other agents, protection of customer rights, customer
confidentiality, fair practices in debt collection, redressal of grievances, etc. Master Circular
on the issue has since been issued.
Measures for ensuring reasonableness of service charges
Reserve Bank has made it obligatory for banks to display and update, in their
offices/branches as also on their websites, the details of various service charges in a
prescribed format. The banks are also required to display the service charges and fees on
the homepage of their website at a prominent place under the title of "Service Charges and
Fees" so as to facilitate easy access to the bank customers. Reserve Bank has also placed a
web-link to these web pages of banks in its website to facilitate comparison of service
charges and thereby enabling the customer to take an informed decision. A Working Group
was also set up to look into the issue of reasonableness of bank charges, which submitted its
Report in August 2006. The Working Group indicated broad principles of reasonableness
that banks should adopt in fixing and notifying the service charges for providing basic
services to individuals. Guidelines have been issued to the banks based on the
recommendations of the Working Group and steps taken by the banks in this regard are
being examined.
Instructions to guard against incidence of excessive interest rates & charges
Based on feedback that excessive interest and charges were being levied on certain loans
and advances, banks were advised to lay out appropriate internal principles and procedures
so that usurious interest, including processing and other charges, are not levied by them on
small value loans, particularly personal loans and such other loans of similar nature. Banks
are also required to fix appropriate ceiling on the interest, including processing and other
charges that could be levied on such loans, which may be suitably publicised.
III. Foreign exchange
Over the last two decades, there has been a paradigm shift in the foreign exchange regime
in India. The approach of conservation and preservation of foreign exchange has been
replaced with a liberal framework aimed at facilitation of external trade and payments and
orderly development of foreign exchange markets. In the process, the RBI has moved
beyond the role of a regulator to that of a facilitator of foreign exchange transactions.
Several measures have been taken to expand the delivery channels of foreign exchange
services for reducing transaction costs and to undertake external transactions in a hassle
free manner. These measures include - licensing of a new category of entities as AD
category-II to handle non-trade related current account transactions and licensing of select
Urban Cooperative Banks and RRBs as well to operate as AD Cat-II. In addition, the norms
for the Full Fledged Money Changers have been reviewed and the ADs have been permitted
to enter into franchisee arrangements for provision of money changing facilities. Further,
measures have been taken to simplify procedures in respect of cross-border flows through
Exchange Houses (Rupee Drawing Arrangements).
Resident individuals have been permitted to make remittances overseas up to USD 200,000
per financial year for undertaking any of the permitted current or capital account transactions
or a combination of both. Only requirements are a designated bank account, PAN number
and a simple declaration.
The critical issue at this juncture is for the banks to ensure efficient customer service by
equipping the frontline staff with up-dated instructions and bring about an attitudinal change
in their approach towards foreign exchange business. It is disconcerting to note that the
incognito visits to various banks have revealed that the services delivered at various banks
are deficient and insistence on unwarranted or complex documents continues for individuals.
Another issue is the reluctance of the banks to extend service to walk-in customers for
handling their small value transactions. We have been sensitizing banks to these issues.
The steps taken by the RBI in liberalizing the forex regulations, delegating authority to the
ADs and simplify the procedures is basically designed to extend the forex services to the
residents and non-residents in a simple and hassle free manner with minimal documentation.
IV. Payment systems
The traditional role of banks as providers of various payment and settlement services to
customers is getting redefined. Until recently, requirements of customers, be it corporate or
retail, were determined and extended by banks based on their perception and understanding
of customer necessities. This to a large extent was also dictated by the banks' ability to offer
such products. The scenario is fast changing and changing for the better. Now, the banks are
encouraged to innovate and tailor products to suit various segments of customers, apart from
being more sensitive to their demands. Competition between banks for market share and the
emergence of other service providers are other reasons for this push.
It is also necessary to put into context the magnitude of challenges that are ahead of us. The
paper clearing volumes we handle is the sixth largest in the world with a volume of 1.44
billion cheques cleared during the year 2007. The RBI has launched the Cheque Truncation
System in the National Capital Region of New Delhi on February 1, 2008 with the
participation of 10 banks in the pilot run. Once fully operational, the system will be the largest
in the world and leapfrog the country into migrating the paper based instruments to the
electronic mode. The electronic suite of products is continuously expanding in terms of
coverage of branches, volume of transactions and number of users availing the facility. The
Reserve Bank has intervened and mandated (a) reasonability in pricing of transactions
effected through ATMs, (b) compulsory use of electronic mode of initiating transactions
above a specified cut-off limit, (c) strengthening the payment systems infrastructure, etc.
Whilst the clearing cycle operating across the country on a T+1 basis for cheques payable
locally, favourably compares with the best in the world, it is necessary to look into the entire
cycle from the time a customer deposits a cheque at a branch till the point of realisation of
credit in his account. There is scope for continuous improvement in overall cycle. Going by
the number of complaints, it is felt that customer-service in this area is not customer-centric.
Albeit the fact that electronic payment products are improving their share in the overall retail
portfolio, the volume of paper instruments would continue to be significant in the near future
as well.
The share of electronic payment products like RTGS, NEFT and ECS is rising by the day and
the number of branches which are offering this facility is also increasing. Notwithstanding
this, the share of public sector banks in the electronic product usage is very less. It is
necessary to make available these products across all bank branches. While the build-up
should continue, banks need to also concentrate on reaching geographical areas and
segments of populace that have not been embraced by this expansion. It is difficult to
achieve financial inclusion without involving rural-India in the payment system out-reach and
those banks who do so first, will reap the benefits of increase in volumes and increase in
market-share, leading to concomitant increase in revenues, and of-course increase in other
businesses as well. And as we all know, the electronic medium is location independent, can
leave a better audit-trail and will surely improve customer involvement and service
expectations. It is our vision that electronic products reach 50% of volume and 95% of value
by the end of March 2009.
Banks need to adopt a "STOCK" approach while conceiving and bringing out products.
Products that are "Secure and scalable", Transparent in terms and conditions of usage,
Operationally resilient and efficient, Cost-effective and reasonably priced, and
Knowledgeable to staff and customers. The customers have an equal if not higher
responsibility to ensure banks adopt this approach while innovating products for them.
V. Currency management
As per the provisions of Reserve Bank of India Act 1934, RBI is statutorily required to
undertake certain activities in the area of currency management. In view of the fact that RBI
has its Offices only at state capitals or at large centres, the services of commercial banks are
used to store banknotes on behalf of the Reserve Bank in the currency chests held at
designated branches. These bank branches may operate on the balances of the currency
chests as per their requirements with correct and timely reporting being their responsibility. A
decision has also been taken to provide the currency chest facility to private sector and
foreign banks with 99 currency chests being held by these banks. Further, now the Urban
Cooperative Bank and RRBs are also allowed to hold the facility. These steps would improve
the availability of banknotes and coins across the country.
The channel of currency chests is used not only for distributing banknotes and coins but also
for collecting back the soiled notes. While the banks are under instructions to sort the
banknotes before depositing them into the currency chest, it was observed that meaningful
sorting was not done as evident from a number of reissuable notes being retrieved at the
level of the Reserve Bank regional offices. To overcome this, all the banks were advised to
install Note Sorting Machines at their currency chests, a task that has been completed. To
carry the Clean Note Policy further, banks have been instructed to process all of their daily
receipts over Note Sorting Machines and keep a daily record thereof. It may be mentioned
here that banks are already under instructions by way of a Directive under Section 35A of the
Banking Regulation Act 1949 on non-stapling of banknotes, issue only good quality of
banknotes and not to write anything on the watermark portion. This would be evident from
the general improvement in the quality of notes in circulation.
Further, to extend the reach of channels for distribution of coins, the services of Post Offices,
Urban Cooperative Banks and Regional Rural Banks are being used in view of their wide
reach to the members of general public.
VI. Financial education and inclusion
Lastly, let me come to the very significant aspect of financial inclusion which has been
pursued with a missionary purpose by the Reserve Bank of India during the last four years.
Given the socio-demographic complexities in India, the endeavour has been towards a
multiinstitutional and multi-instrumental approach to comprehensively address the issue of
financial inclusion in all its entirety, going beyond mere availability of credit. By financial
inclusion we mean the provision of affordable financial services, viz., access to payments
and remittance facilities, savings, loans and insurance services by the formal financial
system to those who tend to be excluded.
Globally the issue of financial inclusion has now assumed significance not merely in
developing countries but also in developed countries. RBI started a focused drive in this
regard in 2004.
In the Annual Policy of the Reserve Bank for 2004-05, the Governor, Dr. Reddy observed
and I quote -
"There has been expansion, greater competition and diversification of ownership of banks
leading to both enhanced efficiency and systemic resilience in the banking sector. However,
there are legitimate concerns in regard to the banking practices that tend to exclude rather
than attract vast sections of population, in particular pensioners, self-employed and those
employed in unorganised sector. While commercial considerations are no doubt important,
the banks have been bestowed with several privileges, especially of seeking public deposits
on a highly leveraged basis, and consequently they should be obliged to provide banking
services to all segments of the population, on equitable basis."
Pursuant to this, the Reserve Bank has undertaken a number of measures with the objective
of attracting the financially excluded population into the structured financial system going
beyond credit to a whole range of financial services.
•
In November 2005, banks were advised to make available a basic banking "no-frills"
account with low or nil minimum balances as well as charges to expand the
outreach of such accounts to vast sections of the population. Banks are required to
make available all printed material used by retail customers in the concerned
regional language.
•
In order to ensure that persons belonging to low income group, both in urban and
rural areas do not encounter difficulties in opening bank accounts, the know your
customer (KYC) procedures for opening accounts has been simplified for those
persons with balances not exceeding Rs 50000/- (about GBP 600) and credits in the
accounts not exceeding Rs.100000/- (about GBP 1200) in a year. The simplified
procedure allows introduction by a customer on whom full KYC drill has been
followed.
• Banks have been asked to consider introduction of a General purpose Credit Card
(GCC) facility up to Rs. 25000/- at their rural and semi urban braches. The credit
facility is in the nature of revolving credit entitling the holder to withdraw upto the
limit sanctioned. Based on assessment of household cash flows, the limits are
sanctioned without insistence on security or purpose. Interest rate on the facility is
completely deregulated.
•
In January 2006, banks were permitted to utilise the services of non-governmental
organisations (NGOs/SHGs), micro-finance institutions and other civil society
organisations as intermediaries in providing financial and banking services through
the use of business facilitator and business correspondent (BC) models. The BC
model allows banks to do "cash in - cash out" transactions at the location of the BC
and allows branchless banking.
•
Other measures include setting up pilots for credit counselling and financial
education. A multilingual website in 13 Indian languages on all matters concerning
banking and the common person has been launched by the Reserve Bank on 18
June 2007.
The key driver in the success of these initiatives would undoubtedly be technology.
Technology today provides a lever which can enable multilevel leapfrogging in pursuit of
financial inclusion. Andhra Pradesh has started a project that aims to improve the
mechanism for paying pensions and unemployment benefits to around half a million people
in villages in the Karimnagar and Warangal regions of the state. It is a tiny start - so far some
40,000 cards have been issued - but the potential is clear. The initiative is to have a bank tie
up and extend this model to other places and states.
The role of financial literacy in this regard can't be over-emphasised. As noted by the
Economist in a recent issue, a global crusade is under way to teach personal finance to the
masses. Governments from USA to Britain to Russia are declaring their commitment to
financial education. This month the World Savings Banks Institute, which represents retail
and savings banks from 92 countries, will hold a summit in Brussels about financial
education in the light of the sub-prime crisis. There is also an exhortation to the policy
makers to simplify the choices available to people in financial matters, quoting the Swedish
savings plan for old age, which offers a choice of funds to invest in but also includes a
lowcost default option, chosen by 90% of the people.
Financial education has an ever more critical role to play in the changed financial landscape
of India which, while on one hand has presented with newer opportunities for future collective
growth, on the other, it has also heightened fears of uncertainty in certain quarters mainly
because of increasing multi-faceted choices and options in the management of personal
finances and exposure to a gamut of risks. Financial education could ideally supplement the
financial inclusion initiatives for long term efficacy. RBI has recently put out a concept paper
on setting up Financial Literacy and Counseling Centres with the objective of providing free
financial literacy/education and credit counselling. The specific objectives of the proposed
FLCCs would be:
•
To educate the people in rural and urban areas with regard to various financial
products and services available from the formal financial sector;
•
To make the people aware of the advantages of being connected with the formal
financial sector;
•
To provide face-to-face financial counselling services, including education on
responsible borrowing and offering debt counselling to individuals who are indebted
to formal and/or informal financial sectors;
•
To formulate debt restructuring plans for borrowers in distress and recommend the
same to formal financial institutions, including cooperatives, for consideration;
•
To take up any such activity that promotes financial literacy, awareness of the
banking products, financial planning and amelioration of debt-related distress of an
individual; and
•
To take up any other activity that facilitates the above.
Once feedback is received, the initiative could be carried forward in consultation with all
stakeholders.
Conclusion
I would like to conclude by quoting from one of Governor Dr. Reddy's speech:
"Banking is a trust-based relationship and the banking licence from the regulator provides an
assurance of trust to the public at large. To the banks, the banking licence provides the
privilege of accepting uncollateralised deposits from the public. However, the acts of stealth
banking, negative option marketing, misleading advertisements, information gathering from
customers for cross selling of products and services, and tie-up arrangements are
inconsistent with the concept of a trust-based relationship. The lack of transparency, coupled
with the difficulty of consumers in identifying key information from the large volume of
material and communication in fine print, leads to an informatio