RBI Governor recently expressed his concern over non-compliance of regulatory standards set up by regulatory entities by the regulated entities such as banks and particularly NBFCs etc related to “value ratios, risk weights, and end use monitoring”. He further said, “The issue that is attracting our attention is home equity loans, or top-up housing loans, as they are called in India, which have been growing at a brisk pace”. He expressed his apprehension about such non-compliance of regulatory standards stating, “Such practices may lead to loaned funds being deployed in unproductive segments or for speculative purposes”. RBI has issued advisory to such regulated entities “asking them to proactively monitor the end use of these loans and ensure compliance down the line.”
Yet another cause for concern is the sluggish growth of deposit in comparison to credit growth which may hit the banks by structural liquidity issue and affect deposit-credit ratio by creating asset-liability mismatch. The Governor also called upon “the lenders to assess and calibrate their underwriting standards as well as post-sanction monitoring of loans.” Whether the regulated entities would take note of the concern and caution articulated by Governor seriously and sincerely and take such steps to arrest such unhealthy and unethical activities is to be seen to be believed.
A perusal of the RBI circulars being issued regularly penalising the banks and other regulated entities will reveal without any ambiguity that the regulated entities are habitual offenders for their non-compliance of RBI guidelines and notifications. The total monetary penalties imposed on banks run into crores which is being paid out of public money of which the banks are the custodians. Can this be denied? The undeniable fact is that such wrongdoings and unbecoming acts are brought to light only at the time of random RBI inspections conducted from time to time and RBI cannot under take inspection of all regulated entities on regular basis. In spite of the penalties imposed, the violations of mandatory provisions of the regulatory authorities are rampant and continue unabated.
RBI has issued the Charter of Customer Right which is reproduced hereunder and it is mandatory for the regulated entities to implement it in letter and spirit.
Charter of Customer Rights
1. Right to Fair Treatment:
Both the customer and the financial services provider have a right to be treated with courtesy. The customer should not be unfairly discriminated against on grounds such as gender, age, religion, caste and physical ability when offering and delivering financial products.
2. Right to Transparency, Fair and Honest Dealing:
The financial services provider should make every effort to ensure that the contracts or agreements it frames are transparent, easily understood by and well communicated to, the common person. The product’s price, the associated risks, the terms and conditions that govern use over the product’s life cycle and the responsibilities of the customer and financial service provider, should be clearly disclosed. The customer should not be subject to unfair business or marketing practices, coercive contractual terms or misleading representations. Over the course of their relationship, the financial services provider cannot threaten the customer with physical harm, exert undue influence, or engage in blatant harassment.
3. Right to Suitability:
The products offered should be appropriate to the needs of the customer and based on an assessment of the customer’s financial circumstances and understanding.
4. Right to Privacy:
Customers’ personal information should be kept confidential unless they have offered specific consent to the financial services provider or such information is required to be provided under the law or it is provided for a mandated business purpose (for example, to credit information companies). The customer should be informed upfront about likely mandated business purposes. Customers have the right to protection from all kinds of communications, electronic or otherwise, which infringe upon their privacy.
5. Right to Grievance Redress and Compensation:
The customer has a right to hold the financial services provider accountable for the products offered and to have a clear and easy way to have any valid grievances redressed. The provider should also facilitate the redress of grievances stemming from its sale of third-party products. The financial services provider must communicate its policy for compensating mistakes, lapses in conduct, as well as non-performance or delays in performance, whether caused by the provider or otherwise. The policy must lay out the rights and duties of the customer when such events occur.”
Are the banks and other regulated entities adhering to the norms of the mandated provisions of the Customer Rights? My answer coming out of my experiences as a NPA Resolution Consultant is a big NO.
Press Information Bureau, Government of India, Ministry of Finance issued a press release dated 06.05.2016 on RBI Norms for Protecting Customers which is quoted hereunder.
“RBI Norms for Protecting Customers
Reserve Bank of India (RBI) has released a Charter of Customer Rights, which enshrines broad, overarching principles for protection of bank customers and enunciates the ‘five’ basic rights for bank customers, that is, (i) Right to Fair Treatment, (ii) Right to Transparency, Fair and Honest Dealing, (iii) Right to Suitability, (iv) Right to Privacy, and (v) Right to Grievance Redress and Compensation. RBI has advised banks to formulate either an exclusive Customer Rights Policy keeping the spirit of the Charter intact or dovetail the existing Customer Service Policies suitably to integrate the Charter and its tenets with the approval of the Board. The banks have since framed Customer Rights Policy with the approval of the Board. Banks have also been advised to review internally by the Board the progress made in implementation of the Charter.
RBI vide its circular dated September 28, 2006, issued guidelines on Fair Practices Code (FPC) for all Non-Banking Financial Companies (NBFCs) to be adopted by them while doing lending business. The guidelines inter-alia covered general principles on adequate disclosures on the terms and conditions of a loan and also adopting a non-coercive recovery method. The same was revised in view of the recent developments with sector including creation of New Category of NBFCs viz., NBFC-MFII and also the rapid growth in NBFCs lending against gold jewelry. Revised circular was issued on March 26, 2012.
The Banking Ombudsman Scheme has specified 27 grounds of complaints under which complaints can be lodged with the Banking Ombudsman on grievances related to deficiency in banking services provided by commercial banks, Regional Rural Banks and scheduled primary cooperative banks. In so far as NBFCs are concerned, no cases of depositor cheating by the entities regulated by RBI have come to the notice of RBI during the last three years”.
Further, RBI has issued guidelines on Fair Practices Code for Lenders. In terms of these guidelines the banks have been advised to frame the Fair Practices Code duly approved by their Board of Directors.” What I learned out of my experience is that when such non-compliance acts of banks and other regulated entities were and are brought to the notice of the banks and other regulated financial institutions and also before DRTs, DRATs and Courts, no cognizance of such non-compliance acts of banks and other regulated financial institutions are taken note of and the regulated entities are allowed to go with impunity. Even when such matters are taken up through Banking Ombudsman who in turn forward such complaints to the respective banks or financial institutions, the reply to the complaint invariably were and are non-specific, vague and evasive (Refer CPC, 1908 Order VIII, Rule 3) and the offenders go scot-free leaving the complainant in the lurch.
In this connection FAQ (Frequently Asked Questions) issued by RBI with regard to housing loans cautioning the public is worth noting and the relevant potion of the said notification of RBI is verbatim produced here under.
“Important – This part is fine printed to help you practice reading the fine print. The loan agreement documentation runs into nearly 50 pages and its language is complex. If you thought everyone signs the same agreements with the bank, where is the need to read? You are not taking an informed decision. If you thought somebody would have pointed this to me if there was any problem, then maybe they did but you could not read or listen to it. Think again! Borrowers’ and lenders’ rights may not be expressed clearly in a transparent manner in all the loan agreements. The home loan agreement may not be provided to you in advance so that this could be read and understood before you sign the agreement. Every method may be used to delay handing over a copy to the borrower in sufficient time. Some areas you may focus are a) check the “reset clause” incorporated by some banks in their home loan agreements that allows them to change the interest rate in the future, even on fixed rate loans. Banks may set their reset clauses for 3- or 2-year intervals. They say a lender cannot have an agreement that a fixed rate is set for the entire tenure of 15 to 20 years as this will cause an asset-liability mismatch. Talk to your bank. b) Please seek clarifications on the term “exceptional circumstances” (if stated in the loan agreement) under which loan rates can be unilaterally changed by your bank. c) A common person thinks that default ideally means non-payment of one or more loan instalments. In some loan documentation it can include divorce and death (in individual case) and even involvement in civil litigation or criminal offence. d) Does the loan agreement say that disbursement of the loan may be made directly to the builder or developer and in the case of a ready-built property to the vendor thereof and/or in such other manner as may be decided solely by bank? It is the borrower whose original property papers are retained with the bank, so why disburse to the builder. Possession of property has been delayed in some cases when the cheque was issued in the name of the builder and the builder refused to pay delay penalty to the borrower e) Does the agreement enable assignment of your loan to a third party? You take into account reputation and credibility of the bank before entering into a loan agreement with it. Are you comfortable with third party takes over or should you also be allowed to move your home loan from one bank to another in that case? Look for ambiguous clauses and discuss with the banker. Some agreements say changes in employment etc. have to be informed well in advance without quantifying the term “well in advance”. f) In one case the loan documentation says “issuance of pre-approval letter should not be construed as a commitment by the bank to grant the housing loan and processing fees is not re-fundable even if the home loan is not processed”. “This is never ending it seems. The above are only indicative instances of what has been observed / reported/ indicated by various sources. However, our main objective was to get you into the habit of reading the fine print. If you have read this, you would have understood the importance of reading fine print in any document and we have achieved our objective. I only wish I could have made the print smaller as in the real cases.”
The banks and NBFCs sanction loans against immovable property by way of mortgage loans without taking the customary precautions merely based on the value of the immovable security without complying with RBI guidelines and other statutory restrictions. No penal action is being undertaken unless and until such acts of non-compliance are found out and reported.
RBI issued circulars on Fair Practices Code for Lenders from time to time but are they being complied with as per Banking Regulation Act by the lenders? The borrowers are the victims. That does not mean that the lending institutions are at fault and borrowers are the perennial sufferers. There are wilful defaulters and fraudsters and RBI has issued specific circulars on how to deal with such wrong doers. In this connection Supreme Court also handed down a judgment to give such fraudsters also an opportunity to be heard before branding them as fraudsters. What is advocated is that the banks and financial institutions have their right to recover their dues from the defaulted borrowers but every right is derived out of a duty to be performed first, the duty being compliance of RBI directions, statutory rules and regulations, adherence to prevailing laws, non-contravention of the provisions of recovery laws of debts such as RDB Act, SARFAESI Act, IBC and Arbitration Act etc. A review of all banking legal documents like agreements when enforceable under law becomes a contract, mortgage creation deeds etc. may be made to evaluate whether such documents are not violating the existing laws and not arbitrarily and unilaterally executed in favour of the lenders only to ensure equality before law (Article 14 of Constitution), Right to Live (Article 21 of Constitution) and right to own property (Article 300 A of the Constitution).
RBI issued a circular dated 07.08.2004 on Deficiencies found in sanctioning of loans and monitoring of borrowal accounts by banks / Financial Institutions consisting of the following aspects of banking which are applicable presently also.
I. Deficiencies at the stage of sanction
II. Deficiencies at the monitoring stage
III. Suggestions to improve the system
All such deficiencies are still persisting. In fact, many of the incidents of accounts being classified as NPA are on account of such aforesaid deficiencies and RBI suggestions are being ignored and complacency overtakes vigilance.
RBI has issued a comprehensive circular DoS. CO.CSITEG/SEC.7/31.01.015/2023-24 dated November 7, 2023 addressed to The Chairman/Managing Director/Chief Executive Officer Scheduled Commercial Banks (excluding Regional Rural Banks); Small Finance Banks; Payments Banks; Non-Banking Financial Companies; Credit Information Companies; and All India Financial Institutions (EXIM Bank, NABARD, NaBFID, NHB and SIDBI) on Master Direction on Information Technology Governance, Risk, Controls and Assurance Practices and also another important circular dated 02.02.2021 on Compliance functions in banks and Role of Chief Compliance Officer (CCO) (Ref: No. DoS. CO. PPG/SEC.02/11.01.005 /2020-21 dated September 11, 2020) hierarchical delegation of powers, duties and responsibilities of the Board of Directors downwards to the floor level officers including that of the compliance officers are comprehensively articulated on paper. But are these directions and guidelines implemented effectively and diligently in practice? That opens up a Pandora’s Box and it is for the regulatory entities to probe in to the matter to find effective solutions and course correction, if need be.
In the final analysis, I quote Mark Twin, “Success is a journey, not a destination. It requires constant effort, vigilance and re-evaluation” which is very much applicable to banks and financial institutions also. Banking also gives an insight into what makes business succeed and what makes business fail.
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