Banking Ombudsman Scheme Set to Fail (Part 1)
Reserve Bank of India is a huge institution
and it is no surprise that there are four Deputy Governors
assisting the Governor. The Banking industry in India itself has
undergone such a transition since say 1970s that the priorities
of Bankers has undergone a significant change.
As a person who entered the Banking system in
1973, my views on Banking service were formed in the era when
Bankers were proud to display on their premises, Mahatma
"A customer is the most important visitor on our premises.
He is not dependent on us. We are dependent on him.
He is not an interruption in our work. He is the purpose of
He is not an outsider in our business. He is part of it.
We are not doing him a favor by serving him. He is doing us
a favor by giving us an opportunity to do so…”
While I have been through the
technological developments in the Banks which accelerated after
the 1980s, my fundamental attitude to customer service has not
changed. I have always considered that Banking should still
remain customer oriented. In fact this is true of every business
and more so a consumer oriented business like Banking where the
commodity of business is "Money" indisputably the most common
factor of possession by the public.
However it appears that
introduction of technology in Banking had some unpredicted
consequences in the attitude of Bankers.
Some time back Mr A. T.
Pannerselvam who also came from the same Bank where I had my
initiation, was the Chairman of IBA and made a significant
observation. He said that "Future of Banking belongs to
Technologists". I have often quoted this in many of my
discussions with bankers to promote the use of Internet Banking.
It was not a coincidence that I was involved in the creation of
the websites of at least two of the major Banks at a very early
stage of use of Internet in Banks.
Of late, it appears that technology
has taken over Banking to such an extent that I often doubt if
some of the Bankers today remember what is the basic principle
I have been observing the reaction
of Banks in response to complaints for Phishing as well as the
requirements of ITA 2000, ITA 2008 and of late to G.
Gopalakrishna Working Group (GGWG) report and the M Damodaran
Committee Report on Customer Service. I have had extensive
discussions with bankers both in Workshop/Across the table
discussions as well as legal discussions in the
Adjudicator/Cyber Appellate Tribunals. Recently I have also
exchanged views with many officials of RBI. From these
observations it is evident that the Indian Banking industry
today represents a complicated combination of people of diverse
views and there is no uniformity of thinking.
Under the circumstances, I was
pleasantly surprised first by Mr M.Damodaran who brought out the
report on Customer Service and highlighted the need for "Zero
Liability E Banking" and also Dr K.C Chakravarty, Deputy
Governor who has on more than one occasion highlighted the need
of "Security in E Banking".
As compared to this, modern
Banks such as ICICI Bank, or HDFC Bank managed more by the
current generation of young Bankers who have no experience of
Banking in the non technological era hold a completely different
perspective. For them a "Customer" is an "Acquisition" and a
"Profit Node". They target each customer to provide certain
amount of profit to the organization and the relationship is
built on how much they can exploit. I once quoted in CAT that
today's Bankers have twisted the Mahatma Gandhi's words as
“Customer is a tool of business to the Bank.
We are doing him a favour by offering our service to him.
He is liable for all my mistakes and his mistakes too.
I am free to introduce any technology that brings me more
The customer has to be aware of the risks of all technology
that I may introduce.”
I suppose the readers will
understand the pain I felt while observing this new
philosophy of Banking. It is in this background that I took note
of Dr Chakravarty's recent address in Vancouver where he
remembered the old Gandhi words on Banking which is attributed
to him during his South Africa days around 1860 and motivated me
to write this article.
Dr Chakravarty recently addressed
the Annual Conference of the International Network of Financial
Services Ombudsman Schemes – INFO 2011 at Vancouver, Canada on
September 21, 2011 and spoke on the Impact of Global
Financial Crisis on Financial Consumers – Global and Indian
Perspective on Need for Consumer Protection – Role of Ombudsmen.
During the speech, Dr Chakravarty recalled the famous quote of
Mahatma Gandhi stated above and I felt elated that there are
still people in RBI who have not forgotten the "Customer" as the
focus of Banking business. This is true of many of the senior
persons in RBI. But recently I came across a lady DGM in
RBI who appeared to represent a different view. This has
brought a realization that even in RBI the younger
generation which has low customer concern is slowly reaching the
top echelons and sooner or later the views of Damodaran or
Chakravarty will be consigned to history.
It is significant to note that Dr
Chakravarty in his speech says " I am often asked ...Why as a
regulator, are you concerned about customer care and protection?
Why is it not left to the market forces and competition to take
care of? ..". He goes on to effectively answer this. But the
very fact that he has to face such questions is significant and
indicates the pressures that must be coming over such persons.
I have indicated in many of my
earlier writings on GGWG report where I have felt that some of
the member Bankers were trying to manipulate the
committee's recommendations to ensure some convenient
recommendations which were not even legally correct were being
pushed through. I still feel that IBA which is more an industry
body and headed by an industry representative is still bringing
pressure on Banks to take a pro-Bank policy view in certain
issues even if the view is anti-customer. I am reasonably aware that a
group of Bankers are already lobbying with RBI to get some of
the more effective parts of the recommendations of the Damodaran
Committee deleted from the final report. I will not be
surprised if SBI is in the forefront of such lobbying since many
cases of E Banking frauds are now surfacing against SBI and
liabilities are staring at them. Regular visitors of naavi.org
may recall that in 2006 I had discussed the possibility of a
hidden loss of around Rs 8000 crores in SBI due to certain
software glitches. (Refer article:
SBI.. Solid Foundation is Melting
TCS.. owe an explanation ). The matter was not
investigated by RBI and was closed on the basis of a statement
from the Bank that the error will be rectified. Recently I have
come across many phishing frauds involving SBI and hence the
stake of SBI in preventing acceptance of Damodaran Committee
report is very high. Additionally, ICICI Bank, PNB, HDFC Bank
are also in the forefront of Phishing frauds and would be scared
of Damodaran Committee report. Some of them are suspected to be
lobbying even with DIT for change of law in this regard.
Dr Chakravarty's words reflect
presence of such lobbying.
Dr Chakravarty goes onto make
another significant observation about the developing
"Information Asymmetry" as follows:
"Consumer trust and protection
has always been an issue of interest and concern for policy
makers and the entire financial industry. The debate has
become particularly acute over the last few years in view of
the recent market developments. In times of globalization,
new opportunities in terms of new financial products, new
instruments and technologies became available posing new
challenges for the consumers such as understanding the risks
associated with complex products. The current levels of
transparency and the consequent difficulty of consumers in
identifying and understanding the fine print from a large
volume of information leads to an information asymmetry
between the financial intermediary and the consumer."
He went on to add
"Financial consumers need
protection because they are at a structural disadvantage
inasmuch as they have difficulty in exercising their market
power since their heterogeneity and mass make it difficult
for them to organize themselves into pressure groups.
Additionally, the fixed costs of procuring information can
be high. A greater degree of protection may therefore make
"For countries where banking
with formal institutions is still emerging, consumer
protection measures must be a top priority. In all such
cases the targeted client groups come from the most
vulnerable and low income segments. This is a major
challenge for the credibility and sustainability of the
whole financial sector. If not properly addressed, some of
the problems faced by these consumers could lead to a
long-term mistrust in formal financial institutions and loss
of confidence in the banking system"
GGWG report (P.S: Subsequent to the
various objections raised by me, the objectionable part of the
original report were removed from the recommendations) has tried
to address this issue by making Banks responsible for "Customer
Education". If GGWG recommendation is to be complied with, Banks
today need to undertake an appropriate education program for
their customers about security (or lack of it) in E Banking
and report the compliance efforts taken to the RBI periodically.
It would be revealing to study how
much of time and efforts are being spared by Bankers today to
educate its own staff on Risks in E Banking. I suspect that the
number of training days that a current Bank employee goes
through is far less than what it was in the previous years.
Today Banks count the man days in training as a direct loss of
productivity at the counters and hence the training investments
are shrinking. If Banks are hesitant to train their own staff,
they can be reasonably expected to ignore the GGWG committee
report on Customer education as well. We need to then see how
strong is the RBI's implementation mechanism.
In the past RBI is known to send
directions but turn a blind eye when the directions are not
followed by Banks.
Recently, I brought to the
attention of RBI incidents in two Banks where there was good
evidence to prove that they had not only flouted the RBI
regulations, but also lied on oath in judicial forums stating
that they have not flouted the regulations or that the
regulations referred to was not even there. I had pleaded for
cancellation of the licenses of the offending branches since
they had violated certain RBI guidelines pertaining to licensing
or customer dealings. PNB went to the extent of lying directly
to RBI in a letter stating that "PNB has not taken a stand that
disputes with customers in a branch in Chennai should be
resolved only in Delhi according to their terms of Internet
Banking" though this was part of a sworn affidavit before a
judicial authority. Now the ball is in the RBI Court to show
that it would not tolerate such arrogant behaviour from Banks
going to the extent of making false statements under oath.
It is therefore natural to expect
that Banks will continue to ignore what RBI may say from time to
time and what good intentioned officers like Dr Chakravarty may
feel. Nevertheless I do appreciate Dr Chakravarty for having
taken a tough stand in respect of customer's interest being
protected and hope his views would be respected by others in
....to be continued
September 24, 2011