Banks' Relationship with Customers - Evolving Perspectives

Summary

Delivered as the chief-guest address at the 4th M. R. Pai Memorial Award Function on 8 April 2008 in Mumbai and issued as a Forum of Free Enterprise booklet, Mrs. Shyamala Gopinath, then Deputy Governor of the Reserve Bank of India, surveys how the banker-customer relationship has been reshaped by the post-1991 liberalisation of Indian banking. She positions her remarks as a tribute to the late M. R. Pai, “the doyen of consumer activism in India,” and argues that even in a deregulated environment dominated by private banks, new technology, and rapid product innovation, the consumer’s position remains structurally unequal — what she calls an “information asymmetry, which renders the banker-customer relationship one of unequals.”

The address moves systematically through the policy architecture the RBI has built to redress that asymmetry: deregulation of deposit and lending rates, new private-sector licensing in 1993, the revised Banking Ombudsman Scheme, the establishment of the Banking Codes and Standards Board of India (BCSBI) as an autonomous self-regulator, and detailed customer-protection guidelines for deposit accounts, settlement of deceased depositors’ claims, KYC, fair-practices codes for lending, credit-card operations, foreign-exchange transactions for residents, and reasonableness of service charges. Gopinath stresses that self-regulation “would have been the ideal redressal,” but heterogeneity of practice forced regulatory intervention.

Later sections address payment-system modernisation (the Cheque Truncation System, RTGS/NEFT/ECS, the goal of electronic products reaching 50% of volume by March 2009), currency-management reforms via currency chests and Note Sorting Machines, and what she identifies as the “very significant aspect” of financial education and inclusion. She frames financial inclusion as a “missionary purpose,” details the basic ‘no-frills’ account, simplified KYC for low-income groups, the General Credit Card, business correspondent/business facilitator models, and the proposed Financial Literacy and Counselling Centres, citing Y. V. Reddy’s 2004-05 policy speech on the exclusionary tendencies of post-reform banking. She closes by quoting Reddy on banking as a “trust-based relationship” and committing the RBI to “democratization of the financial sector.”

Key points

• The address is a tribute to M. R. Pai and is positioned within his tradition of consumer activism, with Gopinath insisting that consumer-protection issues are “as pressing as ever, even more so” in the post-reform economy.

• Deregulation of deposit and lending rates and the 1993 round of private-bank licensing are framed as the defining features of the reforms, but they also generated new problems — service-quality gaps, unsolicited products, fine print, and customer financial unawareness.

• Self-regulation by the industry is described as the preferred model, but the heterogeneity of practice forced RBI to intervene through the revised Banking Ombudsman Scheme and the creation of the Banking Codes and Standards Board of India (BCSBI), an autonomous self-regulatory body which by the date of the address had 70 member banks.

• Detailed prudential and consumer-facing rules are listed across deposit accounts (minimum-balance disclosure, NRO joint accounts, cheque-collection policy), settlement of deceased depositors’ claims (simplified procedures, threshold limits, indemnity replacing succession certificates), and KYC (simplified procedures for accounts below Rs 50,000 and small/low-income customers).

• On lending the focus is on Fair Practices Code disclosure, comprehensive credit-card-operation guidelines (November 2005) covering DSAs, debt-collection, billing and confidentiality, and the August 2006 Working Group on reasonableness of bank charges.

• Payment-system modernisation includes the Cheque Truncation System launched in the NCR in February 2008 (10-bank pilot), and a vision for electronic products to reach 50% of volume and 95% of value by March 2009; on currency management, RBI mandated Note Sorting Machines and the Clean Note Policy.

• Financial inclusion is treated as a “missionary purpose” — no-frills accounts, simplified KYC, the General Credit Card (Rs 25,000 revolving credit at rural/semi-urban branches with deregulated interest), business correspondent/business facilitator models since January 2006, and a 13-language multilingual financial-education website launched June 2007.

• The closing frame, quoting Y. V. Reddy, defines banking as a “trust-based relationship” undermined by stealth banking, negative-option marketing, misleading advertisements, and data-harvesting for cross-selling — leading to the verdict that information asymmetry makes the banker-customer relationship “one of unequals.”