Consumer Protection in the banking Sector

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This article was written by Apeksha Gupta a student of National Law University, Odisha

Consumer protection is the need of the hour. Parliament of India had enacted various legislations in the interests of consumers for transparency, for fair competition, and for preventing the businesses to indulge in unfair practices or fraud. In 1986, the Consumer Protection Act was passed.

There have been many reforms in the banking sector like dilution of government stakes, deregulation etc that resulted in greater competition. Today banking has moved from class to mass and this has resulted in numerous problems. But more attention also needs to be given to consumer protection in regard with the banking sector. Competition helps consumer because it promotes choice, helps brings quality services or products at low rates by reducing inefficiencies. There is reduction in the cost of banking services and consumers need to make use of the facilities available in the changing environment to avail the reduced cost, like use of ATMs, internet or telephone banking.

India has a law specifically focused on consumer protection (Consumer Protection Act 1986) but that is not explicitly for consumers of the financial sector. Matrix for financial consumer protection:

  1. Banking Codes the standards Bureau, India, (BCSBI) or the fair practices code followed by respective banks.
  2. The in- house complaint redressal mechanism set by banks
  3. Ombudsman office
  4. Courts of law

The various functions and the roles of different institutions may be overlapping at times. Where the customer chooses to complain depends on customer’s ease, location.

Consumer protection act 1986

Under this Act, Section 2(1) (o) defines what service is and “deficiency” is defined under Section 2(1) g. Banking service is also covered under the various services mentioned under this Act. Banking Service” here can include receiving of deposits, payment of premium, money lending, locker facilities etc. Deficiency in respect of such services provided by bank can be brought before Consumer forums. As per section 2(1) (d), Consumer includes a person who avails or hires a service for consideration. Hence any person who owns an account in bank or takes a service form bank can file complaints under this act for “deficiency” or regarding unfair practices by the banks. Consumer courts not only compensate for the defect but also for the mental agony suffered or harassment faced. Listed are the few deficiencies in banking services as laid down by consumer commissions and courts of law :

  • Refusing or holding back the amount that was due on fixed deposit after maturity
  • Delay in the payment of amount on term deposits after maturity
  • Dishonor of cheques because of mistake or negligence by bank.
  • Dishonoring of demand drafts because of omission by bank officials.
  • Refusing grant of loans without any bonafide reason
  • Causing undue delay in discharging installments of loan
  • Charging interest at higher rate than what has been specified in loan agreement.
  • Failure in returning securities even after the loan is repaid.
  • Bank’s failure to honour guarantee, if demand was as per guarantee.
  • Liability is on bank if articles in locker are lost
  • loss to customers due to unavailability of securities in bank premises
  • Closing bank account without any instructions in that regard from the account holder
  • Refusing cheque book facility to customer just because of the fact that the minimum balance has not been maintained
  • Failure of bank cashier to account for money deposited at the counter with him(vicarious liability)
  • Rude behavior of bank officials resulting in discomfort or mental agony to customers
  • Without even demanding repayment giving notice to “face the auction or make payment”.
  • Failure at returning the dishonored cheque

Banking Ombudsman Scheme

As an alternate mechanism for dispute resolution, this scheme launched in 1995 had been modified by RBI to bring under its ambit the growing number of grievances. Banking Ombudsman is basically a senior person appointed by RBI. Since then it is being used as a primary forum for dispute resolution. It is not bound by any precedent and in some cases is also not bound by procedural laws and hence the decisions are as per the specific cases. Also banking ombudsman offices create awareness camps, exhibitions, advertisements etc. But there also exists the fact that the scheme is limited to just 27 grounds (including internet banking) and hence it’s needed to expand its scope. The scheme is fully managed by RBI. At present there are 15 offices in the country where complaint can be launched on account of deficiency. Now customer can lodge complaint under BOS if banks do not adhere to the lenders fair practices code or to the code issued by BCSBI that is Code of bank commitment to customers. BCSBI brought out 2 sets of codes, Code of bank’s commitment to the customers and other to the Micro or small enterprises. But in spite of the fact that these codes have now been adopted by banks and have been in existence for such a considerable amount of time, the quality of service provided still requires a lot. This is something very apparent from the numerous complaints received in the country under Banking Ombudsman scheme.

Charter of the Customer Rights

This is a recent step taken by RBI regarding consumer protection. It includes various principles listed as follows:

  • Right to Fair Treatment: Right to treatment of courtesy is with both the service provider as well as with the financial customers. Also, no customer should be discriminated on grounds of age, gender, caste, religion or physical abilities.
  • Right to Honest, Transparent, and Fair Dealing: Service provider must make all efforts possible to make sure that contracts framed by it are transparent in nature and are such that can be understood easily and is properly communicated to common man. Price of the Product, the various risks associated with it, and various conditions which govern over life cycle of product, customer responsibilities must be disclosed. Also customer must not be subject to undue influence, or business practices which are unfair or unjust
  • Right of Suitability: Needs of the customers should be kept in mind while offering products (needs on the basis of financial circumstance of customer).
  • Right to Privacy: Personal information of the customer must be confidential unless there is consent or if this information is required as per law. They have protection right over anything that infringes their privacy.
  • Right to Grievance Redressal: The customer has a right to hold the financial services provider answerable for the products offered. The providers of Financial Service must let the customers know about their policy regarding rights and duties in case of such events.

As said by Dr. Raghuram Rajan on Feb 15, 2016 at “Annual Banking Ombudsmen” Conference, RBI will be taking incognito visits to banks for checking the customer complaints culture prevailing in banks. Secondly he also focused on Charter of customer rights, by stating that RBI will be undertaking reviews on its implementation. Thirdly he insisted on banks to implement the mechanism of grievance redressal in banking operations. He also pointed out on reducing cost of redressal of grievances and to allow customers to use redressal machinery from anywhere at any time by using high level automation.

Important component regarding customer care is the fact that special customers like senior citizens, students, or vulnerable sections should be given special attention from financial service providers. Next change that could be brought is in online transactions where a particular code of conduct must be implemented which should include complaint procedure, liabilities etc.  Financial literacy must also be promoted. At international level, financial awareness is given the highest priority when it comes to protection of financial consumer. Also behavioral changes should be brought about in the organizations and employees at all levels must focus on consumer protection.

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