Wednesday, January 2, 2008

RBI guidelines not much of safeguard for the consumer

While speaking in the Parliament on the issue of banks using musclemen to recover dues Finances Minister P Chidambaram said, "These musclemen are hired by private sector banks. If a PSU bank is found using them, I will get the manager sacked the next day".

But the seriousness is not visible in the statement made by the finance minister in the drafted guidelines that the banking regulator, the Reserve Bank of India came up with on 30 November. Although these guidelines are open for discussion, the note and intention of the guidelines is, at best, a move by the regulator in order to protect the interests of the banking sector that has come under severe criticism for using strong-arm tactics while recovering loans.

RBI continues to believe that it’s prime responsibility to protect banks from insolvency; its discomfort in protecting the rights of the retail customer can be seen clearly from these guidelines.

The guidelines are not likely to bring the much-needed relief to those who have been at the receiving end of recovery agents. It do not have strict guidelines to protect the interests of people who have been victimized or will be under threat.

But the basic question is -- do we need fresh guidelines when a banking code is already in place that deals at length with the procedure which collection agents are required to follow? Clearly the answer is no. There is a need of proper implementation of the code that already exists, and not reams of fresh paper.

Goons’ coming to threaten and collect dues is nothing new, but the issue boiled over when Prakash Sarwankar, a Mumbai resident, committed suicide after being pushed to the wall by recovery agents and the issue hit national headlines.

Though, before these guidelines came, it was hard to find voices from the banking industry acknowledging the use of strong-arm tactics by recovery agents. It took a series of suicides for banks and the regulator to take notice and the result is these guidelines.

But these guidelines fall seriously short of expectations. What the victimized borrower expected from the regulator was strong mechanism that would have made his/her life easier. Whereas the draft guidelines advocate that banks should have a mechanism to address the grievances of borrowers. But, don’t you find contradictory to approach to the same institution for solving the problem whose agents are using these terror tactics?

RBI's steps are not very hard in case of punishment as well. For instance, if a bank is 'proven' guilty of using musclemen for recovering loans, there will be a "ban on a bank for engaging recovery agents in a particular area." There is no clarity about the proposed duration of the ban in the guidelines.

It would have been better to impose an exemplary fine of an amount that would have hurt the bank's bottom line and share price would have acted as a better restriction for other banks and also have brought faith in the average borrower about the regulator's seriousness in protecting his interests.

With the finance minister expressing his views on this subject, the day is not far when we would have the final guidelines on the issue. When they do come out, their effectiveness will rest on their implementation.

Banks have to put extra efforts to train the concerned people to prevent these rules from meeting the fate of the voluntary code. On a different note, the voluntary code is due for review in 2009. It will be interesting to note the changes that are incorporated.

However, given the manner in which measures aimed at protecting the interests of consumers are defying, there is little an average borrower can do except make sure to meet his financial obligations towards financial institutions on time and pray that he does not get to encounter unpleasant situations beyond his control midway through his loan tenure.

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