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Executive Summary
The Indian banking sector is one of the world’s fastest growing markets for inclusive finance. As the planet’s largest democracy and the second most populated country in the world, India is a rising star. As the financial services industry becomes more entrepreneurial and innovative, its risk and product diversification grow. Following the 2006 crisis in Andhra Pradesh, regulators, private banks, and MFIs alike have been increasingly concerned with consumer protection policies. The status of client protection in India seems strong because of a tough legal framework, specific and clear set of policies, and the presence of industry watchdogs as well as a commitment to compliance by the national networks of banks and MFIs. The country’s legal framework is buttressed by strong institutions and the political will to follow through on legislation.
- Banking networks have been persuaded by the Banking Codes and Standards Board of India to adopt a uniform code of conduct that enforces many pro-client clauses.
- Indian Banking Associations have their own codes with strict penalties for non-compliant members.
- Sa-Dhan is the leading national network of MFIs who have enacted a code of conduct proclaiming the organization to be first and foremost client-focused and designed to enhance client well-being in ethical, dignified, transparent, and cost-effective manners.
Introduction
Since 1990, India has emerged as one of the world’s fastest growing economies and is a major player in international economic circles. The Indian economy encompasses a diversity of agriculture, handicrafts, textiles, manufacturing, and services. However, as of 2006, an estimated 29 percent, or 321 million Indians, lived below the national poverty line, and two thirds of the workforce earned their livelihood directly or indirectly though agriculture. There is a growing service sector which plays an increasingly important role in the country. Nevertheless, India faces huge obstacles as it will have to reconcile its soaring economy with the challenge of lifting almost a third of its population out of poverty.
Along with the growing economy, liberalization policies contributed greatly to the expansion of the banking industry. There have been favorable policies for foreign direct investment, which has made the banking industry more dynamic and competitive. Currently, India has 88 scheduled commercial banks, 29 private banks, and 31 foreign banks with a combined network of over 53,000 branches and 17,000 ATMs. Several Indian banks are among the world’s largest banks, such as the State Bank of India and the Industrial Credit and Investment Corporation of India, both of whom have assets over US$100 billion.
As the financial services industry becomes more entrepreneurial and innovative, its risk and product diversification grow. This has posed significant challenges for Indian regulators, who strive to develop clear rules and fair regulations for both customers and banks. Following the 2006 crisis in Andhra Pradesh, where the government closed nearly 50 branches of local MFIs because it accused them of having usurious interest rates, regulators, private banks, and MFIs alike have been increasingly concerned with client-protection policies.
Legal Framework
The Monopolies and Restrictive Trade Practices Act of 1969 lists five types of trade practices that are considered to be unfair in India:
1. Making false or misleading claims about product or service through advertisement or otherwise;
2. Offering bargain prices and making bait advertisements;
3. Offering pseudo gifts or prizes and conditioning sales on promotion contests, the lottery, or games of chance or skill;
4. Supplying unsafe or hazardous products; and
5. Hoarding or destroying goods, or refusing to sell goods, resulting in price increases.
The Consumer Protection Act of 1986 (CPA) was the most significant milestone in the history of consumer protection in India. “It has been hailed as the most progressive and comprehensive socio economic legislation in the country.” [1] It established national, state, and district level judicial platforms where consumers can speedily and inexpensively seek redress for their grievances. It also set up consumer-protection councils at the national and state levels. Banking and financial insurance are considered “services” under the act, making it part of the general consumer-protection framework, but also meaning that banking-specific instances such as interest rates, collection practices, and overindebtedness policies are not included.
The National Consumer Disputes Redressal Commission was created by the CPA to enforce its provisions instated. The National Commission is empowered to issue instructions regarding:
- Adoption of uniform procedures in the hearing of the matters/dispute resolution;
- Provision of copies of documents produced by one party to the opposite parties;
- Speedy granting of copies of documents; and
- Generally overseeing the functioning of the State Commissions or the District Forums to ensure that the objects and purposes of the Act are best served without in any way interfering with their quasi-judicial freedom.
The ministry of Consumer Affairs, Food and Public Distribution, a cabinet level ministry, has a Department of Consumer Affairs. The Ministry’s mandate is the oversight of all measures of consumer protection in the country. The Department of Consumer Affairs is in charge of administering policies for consumer cooperatives, price monitoring, consumer movement in the country, and the control of statutory bodies like the Bureau of Indian Standards and Weights and Measures. The Bureau, however, does not certify any financial services standards.
In mid-2009, the Indian government was close to approving a new microfinance bill that would bolster regulation in the sector. While many of the details were still unclear because the text of the bill had not yet been released, the bill would mandate registration of Indian MFIs and give regulatory authority for the microfinance sector to the National Bank for Agricultural and Rural Development (NABARD), a subsidiary of the Reserve Bank of India. News media reports indicated the bill was substantially similar to a 2007 microfinance bill that was not enacted before the lower house of the Indian Parliament was dissolved following new elections. The 2007 bill would have secured some deposits at microfinance institutions and put in place an ombudsman to deal with client grievances at microfinance institutions.
While the existence of a single regulator for the entire microfinance sector would likely be a step toward normalizing client protection in different institutions, some MFIs and networks opposed the appointment of NABARD as the regulator because the bank is heavily involved as an MFI itself. Organizations including Sa-Dhan (a network of Indian MFIs) claimed that NABARD’s dual roles as a participant in and regulator of the microfinance sector under the 2007 scheme created a conflict of interest that would have compromised regulation. Early reports on the 2009 bill indicated that NABARD was still the proposed regulator.
The Reserve Bank of India (RBI), through its board, undertakes consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies.
Some of the initiatives undertaken by RBI include:
- Restructuring of the system of bank inspections;
- Introduction of off-site surveillance;
- Strengthening the role of statutory auditors; and
- Strengthening the internal defenses of supervised institutions.
The RBI is in charge of a Banking Ombudsman which directly deals with consumer complaints in areas such as credit cards, service deficiencies, undisclosed charges, and noncompliance with the fair practices code. The Ombudsman has jurisdiction over all commercial banks, regional rural banks, and scheduled primary cooperatives in India. The Ombudsman provides a forum for financial consumers to seek redress for the most common complaints against banks.
The Reserve Bank is also in an advanced stage of setting up an independent Banking Codes and Standards Board of India (BSCBI) to ensure that comprehensive codes of conduct for fair treatment of customers are formulated by banks and adhered to voluntarily. The board is not a department of the RBI. The Reserve Bank has agreed to lend the board financial support for a limited period. However, it is an independent banking industry watch dog whose mission it is to ensure that the consumers of banking services get what they are promised by the banks. The BSCBI has drafted a series of codes known as the Banking Code Rules that seek to clearly delineate the banks’ obligations to consumers and microenterprises.
The codes have been developed with the objective to:
1. Promote good and fair banking practices by setting minimum standards in dealing with consumers;
2. Increase transparency so that consumers have a better understanding of what they can reasonably expect of their services;
3. Encourage market forces, through competition, to achieve higher operating standards;
4. Promote a fair and cordial relationship between consumers and their bank;
5. Foster confidence in the banking system.
Membership Details
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Bankmembers of BSCBI have to be fully compliant with the 'Code of Bank's Commitment to Customers'. Membership includes: State Bank of India and Associates: 8 Public Sector Banks: 19 Foreign Banks: 21 Other Commercial Banks: 22 TOTAL: 70 |
The differences between the rules and the codes of conduct is that the former delineates BSCBI’s role in the banking industry, the obligations of member institutions, clear compliance policies, and disciplinary actions in case of violations to the codes. The latter delineates the conduct that banks and financial institutions commit to with their customers.
Some of the notable policies of the Banking Code Rules are:
- Members are to give full disclosure to BSCBI with regards to their compliance with the banking code, BSCBI staff may visit the premises of any member to verify behavior and gather information. Even incognito visits will take place to guarantee compliance.
- All member banks will have a Code Compliance Officer in their branches and head offices, these officers will keep records of breaches to the code and remedial actions taken and inform BSCBI about these occurrences.
- BSCBI will keep the identity of informants confidential in order to protect its sources of information.
- In the case of a breach, BSCBI will be entitled to impose one of the following:
- Publish the member’s name and details of the breach in BSCBIs annual report,
- Issue direction for the future conduct of members,
- Issue a warning or reprimand to the member,
- Cancel or suspend membership for a limited period, or
- Publicly censure the member, by notifying the media of the findings in the breach or breaches and any sanctions applied, prior to posting a press release on BSCBIs website
Some of the notable policies of the Code of Bank's Commitment to Customers are:
- All the key features of the product including interest rates, fees and charges will be disclosed to the consumer.
- All advertisement and promotional material will be clear and not misleading.
- All personal information will be kept private and confidential.
- Collection policy is built on courtesy, fair treatment and persuasion. Nominally:
- Customers will be contacted in their place of choice.
- Staff will identify themselves.
- Privacy will be respected.
- Interaction will be in a civil manner.
- Contact will happen at reasonable hours, not past 7:00 pm.
- Contacts will be documented.
- Inappropriate moments will be avoided at moment of dues collection. - Code compliance will be monitored by the BSCBI.
Networks
The Indian Banks’ Association (IBA) was formed on September 1946 with 22 members. As of July 2008 IBA had 150 members, 115 ordinary and 35 associate. Ordinary members are those who are public sector banks, associate banks of the State Bank of India, private sector banks, and co-operative banks. Associate members are those who belong to state and national level co-operative banks and foreign banks with representative offices in India.
The IBA has a series of 19 objectives which explain in detail its mandate as an association of Indian banks, financial institutions formed for the development, coordination and strengthening of the Indian banking sector. It has helped its members implement new systems and adopt new standards among the members.
Some of the Consumer Protection initiatives that have been adopted by the IBA have included individual IBA Code of Conduct, a Fair Practice Code with model codes for each of the member institutions and subscription to the Banking Ombudsman.
The IBA Code of Conduct establishes that:
- No gifts of any sort from consumers will be received by bank officers.
- Banks will not make negative publicity about other banks’ status in compliance with the code.
- Interest rates and interest methodologies must be publicized.
- IBA will verify the compliance with this code for the banks who appoint an internal code officer who will liaise between IBA and Bank.
The Fair Practice Code is a shorter version of BSCBI’s customer commitment code without most of its strongest components the Code, however, does have a portion on the collection of dues and redressal of grievances. It mentions that a long term relationship between the banks and their clients is very important as well as a commitment by the bank to address complaints in a prompt and adequate manner.
The Model Codes are pursuant only to the Direct Selling Agents (DSA) of banks, because they state the manner in which the DSA will have to behave with regards to the consumers, telemarketing, dress code, gifts and other policies are explained here. There are no clauses concerning interest rates or other policies.
Sa-Dhan, founded in 1998 by SEWA Bank, PRADAN and BASIX among others, is an association of 196 MFIs and other microfinance stakeholders, e. g. capacity builders and networks. All these member institutions have diverse approaches and models, and operate throughout. Sa-Dhan pursues its mission through:
- Encouraging existing and new MFIs through financing and capacity building as well as a supportive regulatory framework,
- Incentivizing existing mainstream financial institutions (mainly banks) to provide microfinance, and
- Building a strong demand system in the form of Community-based Development Financial Institutions (CDFIs).
In order to successfully execute its strategy, Sa-Dhan is working in the following three thematic areas:
- Policy interventions - It looks at providing an enabling environment for the enhancement of microfinance activities.
- Setting standards - Its main function is to facilitate the adoption of best practices within the sector.
- Capacity building - It aims to build sectoral capacity in microfinance.
Sa-Dhan has a set of core values and a Code of Conduct for Microfinance Institutions. This code proclaims the organization to be client-focused and designed to enhance client well-being in an ethical, dignified, equitable, transparent and cost effective manner. It makes it mandatory to provide information regarding interest rates and interest calculations as well as terms of repayment and any other information related to interest rate charges. Moreover, it pledges to provide accurate and complete information to its clients in an understandable manner. Sa-Dhan demonstrates a commitment for fair practices, but has not published a definition of what constitutes fair.
The code is adopted on a voluntary basis by all organizations with the objective of persuading members to join. Finally, it has a section devoted to redressals and arbitrations. Moreover, the Ethics and Grievance Redressal Committee within the network is designed to facilitate compliance with the code. It will recommend to Sa-Dhan the course of action that should be taken in the event it finds an organization is non-compliant with the code.
All India Association of Microenterprise Development
The All India Association of Microenterprise Development (AIAMED) aims to make development finance a significant national strategy in India, as it can enable the poor to become self-employed and also be a nation-building exercise. Its mission is to strengthen non-governmental and other types of organizations involved in development finance and microenterprise, but also the development finance sector as a whole.
AIAMED’s strategy is to provide a platform for community development finance organizations to come together, around the vision of empowering the poor without handouts or subsidies. They aim to build effective coalitions and collective efficiency through networking, joint action, research, training, and information sharing.
AIAMED members (although not listed on the website) provide the poor with small and micro business loans, training, and financial services, which enable them to develop and sustain income-generating and job creating enterprises.
Conclusions
The status of client protection in India seems to be strong because of a strong legal framework, specific set of policies and industry watchdogs as well as compliance by national networks of banks and MFIs.
India has designed an excellent legal framework around consumer protection that entails participation across all sectors. Consumer complaints making their way to the local, state, and national councils with follow-up from the Department of Consumer Affairs within the ministry of Consumer Affairs, Food, and Public Distribution. This is noteworthy because it means that matters relating consumers are of national importance.
Furthermore, India has a financially independent banking industry watchdog, the BSCBI, which has accomplished a feat few others have, convince some of the major banks in the world working in India to adopt the same code of conduct. Among these banks are HSBC, American Express and JP Morgan. It is also important to highlight the detail and length of the BSCBI Codes along with the follow-up administered by the same institution.
On the Network side, it is pleasantly surprising that the IBA also has a series of codes standards for their members reaching a wide array of members (150 and growing). It is important to note that the IBA has strict penalties for banks who are not complying with the code and implements an internal codes officer who safeguards the implementation of the code. This is an important step because it means banks are dedicating resources geared towards consumer protection.
Finally, Sa-Dhan shows the MFI network’s commitment to consumer protection with its code along with a strict set of reporting policies. AIMED unfortunately does not have similar information published in their report.
[1]D.P.S. Verma. “Developments in consumer protection in India.” Journal of Consumer Policy. March 2002;21.1. pg 111.
These profiles are not exhaustive and have not been reviewed by country experts. If you notice a gap or error in any of the profiles, we would very much appreciate your comments about how they can be improved. In this way we can work together to expand our understanding of the variety of client protection strategies and initiatives that are being pursued in different parts of the world.
