In a recent incident, a senior citizen, a retired general manager of a private sector company who had invested his retirement benefits in fixed deposits with a private sector bank was convinced by the bank’s representative to invest ₹2,00,000 in an investment scheme assuring his funds would earn a minimum 11 per cent interest and there would be no deduction of income tax upon withdrawal after three years.

Another representative from the same bank visited the depositor after a period of one year from the initial investment and convinced him to prematurely close three FDs aggregating ₹7,00,000 and invest the proceeds in the same scheme.

After completion of three years the customer found that he had earned only about 3.5 per cent returns. The representative who sold the scheme was no longer in the service of the bank and the customer was in a hapless position.

S S Mundra, deputy governor, RBI, calls this a clear case of selling of a product which was not suitable to the needs of the customer. “A retired person needs a secure and steady return on investments and any financial product where returns are not assured is not suitable for such customer,” he told a gathering of the Principal Code Compliance Officers (PCCO) of banks.

Poor service scores

Earlier this week, at an event organised by The Banking Codes and Standards Board of India (BCSBI), Mundra’s address harped upon the fact that customer service and enhancing customer experience was the primary responsibility of the banks. He said, “The onus of empowering the frontline staff and ensuring the presence of well-informed and courteous frontline executives rests squarely with the banks.” The RBI official observed that the fair practices code adopted ‘voluntarily’ by banks and financial institutions almost a decade ago was being observed more in breach than in practice.

With banking services being offered to people using a variety of channels such as phone banking, ATMs, point-of-sale terminals, internet and mobile banking, anywhere banking using the core banking solutions, the complexities of service delivery have increased manifold and so have the number of complaints that customers filed against banks.

A rating exercise done by BCSBI — the agency entrusted with framing codes and standards for delivery of customer service for individuals besides micro small and medium enterprises — found that only 14 per cent of banks were rated high, 49 per cent were above average and 21 per cent received average. The findings revealed that a number of banks needed to enhance the present level of code implementation and appropriately fulfil their commitments to their customers laid out in the codes.

The banking ombudsman scheme which enables customers to file complaints against banks for lapses in service delivery saw a high percentage of complaints related to (about 33 per cent) non-observance of the Fair Practices Code and non-adherence with commitments made under the BCSBI code. The next in the order were complaints relating to credit and debit cards, deposits accounts and pensions.

Mundra said that the large number of complaints on account of non-adherence to codes or standards is difficult to accept as the banks have voluntarily accepted these codes formulated by the BCSBI. He cautioned that banks should clearly demarcate the roles of the Internal Ombudsman, the Principal Nodal Officer and that of the PCCOs coupled with a clear chain of command so as to avoid overlaps or vacuums.

How customers were cheated

Narrating real life instances, Mundra said that raising customer awareness on safe usage of electronic channels such as ATMs, internet/mobile banking channels was the responsibility of banks as use of these channels meant a decrease in the operating costs of banks. “It’s imperative for banks to have a robust mechanism to prevent incidents of fraud in areas of mobile or net banking and electronic fund transfer so as to retain customer confidence in these delivery channels,” he added.

Mundra said an unnerving episode of mis-selling of insurance products by the DSAs came under the lens recently. The agent promised loans from an NFBC at a very cheap rate, provided the customer bought a particular insurance policy. Detailed inquiry later revealed that the named NBFC no longer existed under that name, the agent was not an employee of any NBFC and this was just a ploy to mislead the customer into buying an insurance policy. Such proposals were then tendered to the bank from the DSA and were accepted by them without any verification. “Needless to say it amounts to a fraudulent transaction. Bank would surely face an aggrieved customer later on. Such cases of mis-selling are rampant and as sellers of third party products using their own staff/ DSAs, the banks are equally vulnerable. Often, higher sales targets coupled with front ended high commissions are the main motives for such mis-sales. There is no real oversight on unethical selling of third party products,” he said.

Giving another recent example of failure of a bank to render proper customer service, Mundra cited the case of a customer who was sanctioned a home loan and had agreed to take a life insurance as a cover for the loan and signed relevant documents. However, the loan sanctioned and disbursed was for a lower quantum than what was originally applied. On the unfortunate death of the borrower, the bank contested the claim stating that at the time of availing lower quantum of loan, the borrower had not submitted an insurance proposal form and hence, the bank had not taken insurance. “Our analysis revealed that the loan instalments paid by the customer included the insurance premium as well but the bank had failed to complete the process of insurance. The appellate authority adjudicated that the bank was at fault and it didn’t have appropriate procedure to secure insurance after the sanction of the loan and hence, an award was given in favour of the customer,” said Mundra.

He pointed out that several field level studies have been undertaken by various consumer organisations in this area. The RBI has also undertaken a study on mis-selling of Third Party Products (TPPs) in semi-urban and rural areas, which has revealed startling facts.

“The Right to Suitability enshrined in our Charter of Customer Rights has been totally ignored or rather knowingly violated for the reasons best known to the banks. It would be appropriate for the banks to put in place a system of periodic inspection of the sale of third party products by involving their internal inspection teams and plug the loopholes, wherever identified. The PCCOs need to play a central role in administering this,” he said.

Money muling

Another area that banks need to guard against is misuse of accounts for money muling. In a recent episode, it was observed that an idle account was used to receive and transfer large funds without the knowledge of the account holder. The fact came to light only when the income tax authorities served a notice on the account holder. “This episode highlights the failure of bank’s systems and processes for monitoring of accounts. The newly opened accounts under the Pradhan Mantri Jan Dhan Yojana could be very vulnerable to such sharp practices and, hence, banks need to clearly guard against them. Kite flyers and the Ponzi scheme operators also sometimes use mule accounts to swindle public money,” he said.

The other area of concern was high service charges and negative balance in savings accounts and levying of excessive charges for various services. Mundra said that while the RBI did not wish to micromanage the banks’ affairs, the imposition of uncalled-for charges certainly invokes attention. He said despite guidelines on non-imposition of charges for non-maintenance of minimum balance in a savings bank account, the RBI had been receiving complaints of such practices. “I insist that all banks must stop these practices forthwith if not already done so,” he said.

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