A case for making RBI regulations plain, simple

Plain language in communication will help customers of financial services to become aware of their rights. It will make information accessible and help the RBI's work

The April bulletin of the Reserve Bank of India (RBI) has an interesting study on ‘Gauging Linguistic Complexity of Regulatory Communication’. Shorn of jargon, it measures the complexity of the language in central bank regulations. It suggests that most circulars require the reader to be a graduate, which is generally the education level of commercial bank employees. However, a corollary emanating from this conclusion is whether circulars should be aimed only at regulated entities or should they also be able to be understood by common people who use banking services. As the latter is needed too, a simpler version of regulations would be ideal.

Internationally, there has been an increase in the quantity of regulations churned out. The study cites that Basel I regulations had 30 pages while Basel III had 1,868 pages. The increased quantity adds to complexity and reduces manageability. As per the Automated Readability Index and the Fog Index Study, methodologies used by researchers, all documents analysed by the authors were “difficult” or required 18 years of education – that is post-graduation.

One interesting feature which the authors examined is the use of restrictive words like ‘prohibited’, ‘restricted’ and ‘compulsory’. On an average, after every 71st word in a circular comes a restrictive word. The authors argue that this is in tune with the findings of Bedi and Narang (2021), which was based on the top ten most restrictive laws in India. However, as all regulations of the RBI are not restrictive in nature, there is a case to have fewer restrictive words, thus making the tone a little more neutral, if not positive. The authors also identify multiple referencing as a reason for complexity – an area the RBI can work on further.

However, after the recent work of the Regulatory Review Authority 2.0, there has been significant movement towards rescinding redundant circulars, reducing the need for multi-layer referencing.

The authors conclude that the results of their study indicate that regulations issued by the RBI’s Department of Regulation require college or post-graduate level education to read and interpret them. Further, they argue that given that these regulations are not for the layperson, but for commercial bank officers and staff, whose education level equals at least graduation or post-graduation, this level of complexity may not be a problem. However, such a conclusion does not take into account the need for some of these regulations to be understood by common consumers of financial services.

Circulars such as those pertaining to ‘Financial Inclusion-Access to Banking Services’ (2019), ‘COVID19 Regulatory Package (2020)’, ‘Encouraging Formalisation of MSME sector (2018)’ and ‘Customer Protection-Limiting Liability (2017)’ are required to be understood by consumers much as it is addressed to banks. Lack of simplification in circulars and requirement of higher education to comprehend them goes against the objectives of customer education and financial literacy, and, in turn, hurts the RBI’s efforts to demystify its role.

There is, therefore, a need for a simpler, multi-lingual synopsis of the regulations relating to customer protection, fair practices code, payment systems, cyber frauds, financial inclusion and other areas. This would require a plain language drive by the RBI, just as it managed to overcome the historically used ‘may’ in place of  ‘shall’. Simplifying regulations would plug the information gap and help customers to be aware of their rights. This would significantly complement the 360-degree, multimedia campaign that the RBI has undertaken for financial literacy. Taken together, the redesigning of communication tools, be it a direction, circular, synopsis or even an advertisement, will tilt the balance of information dissemination a bit more towards the customers especially those at the bottom end. This will undoubtedly help in bridging the asymmetry of information in regulatory space.

The writer is a former executive director of the RBI