RBI vs MoF: Pot, kettle & citizens

Both the RBI and the MoF are responsible for the humungous mess of bad loans in public sector banks, the disastrous train wreck called IL&FS, and the blunder called demonetisation

In late October-early November, the Ministry of Finance (MoF) got into a very public spat with the Reserve Bank of India (RBI). Most of us got sucked into debates on Section 7 of the RBI Act, and whether prompt corrective action (PCA) on bad banks and new defaulters is too harsh and whether the RBI needs to provide more liquidity to smaller companies. Where should you stand on all this? If you are an ordinary citizen or a consumer, the entire debate is pointless. Neither the RBI nor the MoF cares about the many issues that affect us directly or indirectly everyday. The financial consumer and investor have to walk through a mine of treachery and deceit on an everyday basis, about which neither the RBI nor the MoF is bothered.

Example 1: A 70-year-old man walks into a bank (which happens to be “regulated” by the RBI). He wants to renew his fixed deposit because he needs a regular income. The banker, whom he trusts, tells him to buy a life insurance product approved by the insurance regulator, which is overseen by the Department of Financial Services, MoF. The product is a single-premium policy, “which would act like a bank FD and pay fixed, regular interest. It can be encashed anytime like a bank FD,” says his bank. He discovers it is an insurance product that requires him to pay a fat premium for five years. His complaints and protests fall on deaf ears. He gives up and loses a big chunk of his savings. This is a case of downright cheating. It is happening everyday all over India, under the watch of the regulators, which do nothing to help. But try to get the attention of brilliant PhD-holding minds working with the regulators or the toppers of the Indian Administrative Service (IAS). The RBI governor is known to have told a renowned financial expert that the insurance regulator should handle these cases, although the bank does the cheating!

Example 2: Millions of people have been encouraged to borrow at floating rates. Under floating rates, when interest rates or repo rates go up, interest rates for borrowers go up too. Conversely, when the rates go down, the rates for the borrowers should drop. What happens in practice? The RBI’s own report has laid bare the cheating that occurs. It said: One, the lowering of rates was uneven across borrowing categories. Two, rates go up more during the tightening phase and drop much less during the easing phase. Three, banks deviated in an ad hoc manner from RBI-specified methodologies for calculating rates, including making inappropriate calculations. Four, banks took more than six months to lower rates (my emphasis). 

Five, spreads charged by some banks seem excessively and consistently large. Six, spreads were changed arbitrarily by banks for similar types of borrowers. Seven, the entire process of setting lending interest rates by banks is opaque. Eight, banks cooked up costs to reduce the possible interest rates cut, without any documentation for this. Nine, many banks did not have a board-approved policy for working out the components of spread while some banks did not have any methodology for computing the spread (my emphasis). I could go on with this long litany from the official report but I will stop here.  

This is a severe indictment of the entire banking system and large-scale cheating of borrowers, through a system designed to be unfair, discriminatory and opaque, running into more than Rs 300 billion of excess charges. The RBI’s response when Moneylife Foundation raised the issue? A thundering silence. You would think that with a vast bureaucracy of six joint secretaries, two additional secretaries, two economic advisors and scores of junior officers, the MoF at least would be interested in a matter of wide public interest? Fat chance.

The RBI is fully aware that bank consumers are dealing with these issues every day and being cheated: Bank charges are arbitrarily levied; there is gross mis-selling of third-party products; there are complicated and vague KYC rules which harass consumers; banks are allowed to sell gold at ridiculous rates while they are not allowed to buy back from the customer at similar rates; technology systems are opaque with frequent glitches and miscalculations that harm consumers; poor grievance redress, etc.

When Raghuram Rajan became RBI governor, we had the opportunity to take a few of these issues to him. He knew that the West had made consumer financial protection the centrepiece of financial sector regulation after the financial crisis of 2008. However, I discovered that he wasn’t very interested in consumer issues; they never figured in any of his speeches either. When we raised a slew of customer issues with him, his reply was “we should not push the pendulum back to the other side (which is too much in favour of consumers)”!

The fact is both the RBI and the MoF are responsible for the humungous mess of bad loans in public sector banks, the disastrous train wreck called Infrastructure Leasing & Financial Services, and the blunder called demonetisation. If you notice, they are not even fighting over who is to blame for such egregious institutional failures, for which we, the people, pay in the form of higher taxes, higher interest rates, or both. It is the case of the pot calling the kettle black. As consumers and citizens, if we get into a discussion as to which side is right, the joke is on us.

The writer is the editor of www.moneylife.in

Twitter: @Moneylifers