Despite repeated reminders from the Reserve Bank, customer service continued to be a grey area for most Indian banks, and loan pricing looks hazy in this unclear zone.
Interest rates go up automatically when the central bank hikes policy rates but customers need to reach out to the bank and often pay a fee to lower their loan rates when the policy rate falls. Then comes the aggressive canvassing for loans which is no less than an everyday harassment.
Such aspects should remain at the top of the agenda for the lenders while framing their new year resolutions.
Unjust penal interests
In 2023, the RBI highlighted the issue of poor customer service to banks more than once. On August 18, the regulator tweaked the norms related to banks imposing penalties on loan accounts for violation of contractual terms by borrowers and said that such penalties to raise revenue was unjust.
The RBI said banks must treat penalty for non-compliance as ‘penal charges’ and it should not be levied in the form of ‘penal interest’ that is added to the rate of interest charged on the advances. Besides, the central
bank has announced a host of changes in the rules that will come into effect from January 1, 2024.
There should not be capitalisation of penal charges, meaning no further interest computed on such charges, the RBI clarified, mentioning that this will not affect the normal procedures for compounding of interest in the loan account.
The RBI announced the change after observing that many banks use penal rates of interest, over and above the applicable interest rates, in case of defaults or non-compliance by the borrower with the terms on which credit facilities were sanctioned. While the intent of levying penal interest is essentially to inculcate a sense of credit discipline, supervisory reviews have indicated divergent practices among banks, the RBI said.
Selling pressure on executives
The larger issue of customer fairness is not only about penal charges, but also about gross mis-selling of products through bank branches.
Bank branches face heavy pressure from the senior management to hard-sell insurance policies and other financial products to their customers. Often, the risk involved in such products are not apprised to the target customers adequately, which leads to mis-selling. One example is when former Yes Bank executives sold AT1 bonds to FD holders pitching these as ‘super FDs’ (meaning products with the safety of an FD but with higher rate of return). Eventually, many retail investors found their money stuck in these instruments when the AT1 bonds were written down by the bank during the bailout.
Banks aren't fair to customers even when they force-sell products. In 2023, we saw a viral video of a private bank official scolding his junior staff for failing to meet insurance sales target. It eventually led to punitive action by the lender. Under such toxic culture, junior employees are forced to sell products to clients that may not be suitable to them.
Aggressive loan canvassing
People are fed up with loan canvassing harassments. Repeated calls from bank BPOs are nothing short of a harassment.
Banks must stop making such cold calls multiple times a day and push lower-level executives to sell loans to customers even when they do not need it or investment products that they don’t understand. And, it the borrower fails to repay the loan, comes a deluge of calls for recovery. We have seen many cases of suicide over harassment for defaulting on loans sold in a haste by banks without adequate transparency to the borrower.
In June 2023, a set of critical proposals put up by an expert panel of the RBI came as a reminder to the banking system to improve customer care standards in line with evolving products and services. The RBI had set up the panel on May 23, 2022 under the chairmanship of former deputy governor BP Kanungo.
On June 5, 2023, it proposed a list of recommendations to improve customer service standards in regulated entities. One of the major proposals is to empower the RBI Ombudsmen (RBIOs) to direct the regulated entities concerned to review and undertake suitable corrective action in all such cases and confirm compliance to the apex bank. These included rules on cross-selling and deposit insurance cover and operations of call centres.
What's the larger point here? The banks need to realise that these are institutions dealing with public money and operating on the basis of trust. Whether it is about imposing undue penal charges on customers or mis-selling products — such actions are bound to take away the trust from the customers.
The positive news is that we have a watchful regulator which acts as a the guardian to protect the interests of the average customer. But, fairness in customer transactions should ideally come from self-regulation, rather than regulatory action. Boards of the banks have a very critical role in ensuring the rules are followed in letter and spirit.
Let improving the customer experience be top of the agenda for banks in 2024. Wish a happy New Year to all readers of Banking Central.
Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.
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