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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 Gandhi's words

"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 it.
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 of Banking.

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 follows:

“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 money.
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 and SBI...and 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 sense"..

"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 RBI.

....to be continued


September 24, 2011



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