Tamal Bandyopadhyay: Making the customer king

Hyderabad-based software professional Niranjan Sawant (name changed) used to pay Rs 30 on the bank draft he sent to his parents in Mumbai every month until the Centre introduced the service tax.

The cost of the draft immediately shot up to Rs 35. Sawant could not understand how this could happen. At 10 per cent, the service tax could jack up the cost of the draft to Rs 33.

Add to that, 2 per cent education cess and it works out to Rs 33.60. So, why should he pay Rs 35? The bank had no answer. While the government gets Rs 3.60 from this transaction, the rest (Rs 1.40) adds to the bank's bottomline.

Technically, this practice is called stealth banking. Banks can take the loan defaulters to court for non-payment of dues and seize their property and sell them to recover money.

Corporate borrowers can force the banks to abide by the norms of "lenders liability" like releasing money at the right time. But retail customers "" millions of depositors and those taking home and consumer loans "" have no doors to knock to raise issues against stealth banking.

No wonder Mint Street heard a collective sigh of relief from the Sawants of the country last week when the Reserve Bank of India (RBI) walked the talk and released the recommendations of the S S Tarapore-headed Committee on Procedure and Performance Audit on Public Services.

These recommendations will form the platform for the proposed Banking Codes and Standards Board of India (BCSBI), which is expected to take off by September.

While a section of the bankers and banking consultants in private has dubbed this as a retrograde step in an economy where competition and market forces determine the winners, consumers have started celebrating.

Before we dissect the controversy, let's take a closer look at the proposal.

The board is likely to be set up as an independent organisation but strongly supported and fully funded by the RBI.

There will be a formal covenant between a bank and the board, which will lay down the disciplinary powers of the board and this document will serve as a registration.

Based on the reports of the relationship managers who will be in touch with the banks and the board's own assessment, the banks will be asked to explain in writing any deviations from the codes and standards.

The board will give its decision on a case after giving the bank an opportunity to make an oral presentation before it, but the "board's judgement would be final and not subject to revision/ arbitration by any other body". In other words, once they sign the covenant, no bank or customer can take legal recourse if they are not happy with the board's decision.

The board can publicise the name of the banks and details of the breach of service code. It can even include details of the breach in its annual report.

It can warn or reprimand the bank and even go for public censure. Finally, it can even cancel the bank's registration with the board.

Finally, the board will have the power to delist an accredited bank. The covenant between the bank and the board will require that a delisted bank will have to report the matter in its balance sheet.

Now a look at what some of the bankers say in private. First, there are enough checks and balances on a bank's interface with its retail customers.

For instance, the RBI conducts its annual inspection "" both offsite and onsite. There are concurrent audits, too, in some of the important bank branches. Then there are banking ombudsmen in every Indian state to deal with customers' grievances besides the Indian Banks' Association, the premier bankers' body, which is expected to keep a tab on such issues.

If these are not enough, there are Central Bureau of Investigation (CBI) and Central Vigilance Commission (CVC) that keep hounding the banks on even relatively minor issues. So, why would still there be need for establishing a board to ensure services? Possibly to park some retired bankers and bureaucrats.

Going by the committee recommendations, the board could consist of five members drawn from different disciplines and will be assisted by a small staff of qualified and experienced persons.

Besides, there could be a large number of relationship managers. So, one can expect to find many appointments to the board of those who otherwise could not have been accommodated as ombudsmen. After all, one state can have only one ombudsman.

Finally, the Banking Code of the British Bankers Association (BBA) "" on which the proposed board is modelled "" is a voluntary code that sets the standards of good banking practices for financial institutions to follow when they are dealing with personal customers in the UK.

However, in the Indian context the rules look draconian as the board's judgement is final and no appeal against it is allowed.

In the UK, where the banking landscape is highly consolidated with half a dozen banks accounting for about 60 per cent of the total business, institutional protection of retail customers is warranted.

However, the Indian banking industry is a very different kettle of fish. Barring the State Bank of India group (which accounts for about one-fifths of the market), there is virtually no player that has more than a 5 per cent market share.

When competition is intense, market forces eject inefficient players that offer poor services. Which is why banks these days are more concerned about customer retention than customer acquisition.

Prima facie, there is merit in these arguments. However, the point to note is that it will not be mandatory for banks to be registered with the proposed board.

Only those banks that sign a covenant with the board will be required to abide by the board ruling. Indirectly, though, there will be pressure on banks to sign the covenant as those who are out of the ambit of the board will not be trusted by the customers.

Canada has its Office of the Superintendent of Financial Institutions (OSFI) to handle service charge complaints in the banking industry. In the US, consumers unions are fighting it out to protect the vulnerable consumer from "never ending bank fees".

In the UK, the BBA's banking code lays down customers rights for banking services like savings deposits and current accounts, card products and loans.

In India, agencies like CBI and CVC do not look into the services offered by banks. Their focus is on bank frauds. The consumer courts, too, are over-burdened and they only address individual complaints and not systemic issues.

The only body that could have tackled this is the IBA. Unfortunately, it still remains a bankers club and has not lived up to playing the role of a self regulatory organisation.

The market is, indeed, a great leveller but as a paper on Treating Customers Fairly, by the UK's Financial Services Authority (FSA) pointed out, "competitive forces alone will not ensure fair treatment or adequate consumer protection".

The FSA has found out that a significant proportion of the population have poor literacy and numeracy skills. About 25 per cent of adults in the UK have "very low" numeracy, being unable to perform the simplest calculations and only 33 per cent of consumers regularly review their financial situation.

It also says that the consumers cannot identify the key information from the maze of volume, complexity and variety of material and messages that they receive from the financial services sector.

Finally, the long-term nature of many financial products means that it is often a long time before the customer realises whether the product is serving its purpose. If this is the case in a developed market, Indian consumers' financial literacy could be any body's guess.

A carefully crafted service board can really make a king out a consumer in the banking space which is seeing a huge boom for products sold to retail consumers.