Are some Regulations More Important than the Others?

In order to ensure transparency, banks should use only external or market-based rupee benchmark interest rates for pricing of their floating rate loan products. The methodology of computing the floating rates should be objective, transparent and mutually acceptable to counter parties.

Banks should not offer floating rate loans linked to their own internal benchmarks or any other derived rate based on the underlying. No, this is not an extract from any of the Blog Posts at Apnapaisa.

Rather this is a contained in a circular of the RBI dated July 1, 2006 and re-iterated faithfully in annual master circulars (which consolidate all regulations governing interest rate on advances) every year since, including on July 1, 2009.

This is supposed to be binding on all banks and yet to the best of my knowledge many banks in the country are following this diktat. The biggest complaint today on Home loans is that banks link their floating rate loan products to their internal benchmark rates only and not to any external rate. Clearly this is one RBI regulation that is not being followed.

Let me turn to the experience of my nephew (we also incidentally share the exact same name) on another such regulation not being followed by the banks. My nephew wished to pay his monthly credit card bill vide a cheque.

He wanted acknowledgement of the cheque deposit on the bank counter, which the branch was unwilling to give. His employee (who had taken the cheque for deposit) was brusquely informed to drop the cheque in the drop box and told in no uncertain terms that an acknowledgement was not possible.

My nephew dug out a copy of the RBI circular dated April 10, 2004 wherein the RBI has clearly directed that ‘the facility for acknowledgement of the cheques at the regular collection counters should be available to customers and no branch should refuse to give the acknowledgement if the customer tenders the cheques at the counters.

We agree with this recommendation and advise that it is important that there is no curtailment of the rights of the depositor to obtain an acknowledgement by going to the concerned counter. You may please advise all your branches to ensure that the above instructions are scrupulously followed and customers are not inconvenienced in this regard. (Emphasis added). I think anybody who has tried to get an acknowledgement from a bank counter for payment by cheque of a credit card bill will immediately empthasise with the experience of my nephew.

But let’s revert to the experience of my nephew. When even a personal visit by him to the branch did not yield any results, he filed an official complaint with the bank. When that did not yield any results he filed a complaint to the banking ombudsman with a copy to the bank.

Only then the bank got into action and agreed to accept and acknowledge the cheque over the counter in the future and even provided a written apology. The banking ombudsman closed the case based on this apology letter and expressed inability to announce any punitive measures to prevent such occurrence in the future. A complaint to the RBI to take punitive measures to prevent a recurrence of such action was also turned down.

The upshot is that my nephew continues to face the same problem month after month. His employees are now adept at carrying a copy of the apology letter issued earlier and on that basis getting an acknowledgement for the cheque.

But it is clear that the bank is not providing the same service to any other customer who may not be as persistent as my nephew. Clearly a case where the RBI regulation is observed more in its breach.

This is not to say that RBI goes easy on the banks, which violate its regulations. In fact for regulations that are important for systemic stability even minor violations are punished with warnings and fines.

That’s the main reason why our banking systems came out unscathed from the global financial tsunami, which took down with it several globally renowned banks. Even in consumer facing regulations the office of the banking ombudsman has bought significant relief to consumers.

But the real issue is that some consumer facing regulations have been bought in whose financial implication on the banks is perhaps not understood fully. For example on the acknowledgment issue, banks are quick to argue that providing a facility to acknowledge cheques across the counter is an expensive affair. That may be true but the solution lies in explaining things to the regulator to drop the regulation and meanwhile following the regulation scrupulously.

In fact on the regulation on fixation of external benchmark rates for floating rate loans the financial impact of following this regulation is very significant both for the banks and for the affected consumers.

It would be interesting to see what will happen when an affected consumer complains to the banking ombudsman about the non-following of this regulation by the banks.

It would be interesting to see whether the regulation changes or the banks are forced to follow the existing regulation. Either ways it will have a significant impact.