Reserve Bank India caps customer liability in fraudulent deals

MUMBAI: The Reserve Bank India has decided to cap the customers’ liability arising out of fraudulent electronic transactions, and has warned banks that they should plug the loophole leading to misselling of insurance products, failing which they would be penalised.

“The RBI is examining whether to issue regulatory directions to reduce the liability of the customer on fraudulent transactions arising out of electronic banking transactions,” said RBI deputy governor SS Mundra, speaking at an event organised by Banking Codes and Standard Board of India. “Between the two -- the institution and the customer -- the balance of power is skewed. The idea is that the liability for the customer should not go beyond a point,” he said.

At present, BCSBI —a quasi-re Rs 10,000 beyond which a customer is not liable for fraudulent ecommerce transactions, provided the customer has notified the bank about it. Stating that misselling has been rampant on insurance products, he said, “Often higher sales targets, coupled with front-ended high commissions, are the main motives for such misselling. There is no real oversight on unethical selling of third party products.”

Since banks have a huge network of branches, insurance companies have tied up with them to sell their products. Banks earn commission for hard-selling insurance schemes which gives a boost to their bottomline. While directing banks to plug this loophole, Mundra said, “RBI would take strict action, including heavy penalty, if the banking industry continues to harness such unethical and unacceptable practises of misselling third party products. It would be appropriate for the banks to put in place a system of period inspection on sale of third party products by their own staff or DSAs.” Talking of cyber frauds, he said that it is imperative for banks to have a robust mechanism to prevent incidents of frauds in mobile, net banking and electronic fund transfer to retain customers’ confidence in these delivery channels. These channels are very meaningful in terms of facing competition, reducing cost and improving customer base.

“But if customers’ don’t get confidence in the channels, they may migrate to other banks or use traditional channels which would mean higher operating cost for the banking system,” he said.

Mundra also said that a nodal officer at the bank, appointed for customer grievance, should analyse the root cause to ensure that similar complaints do not arise again.