Speeches

Speech delivered by  Kishori Udeshi, Chairman,  Banking Codes and
 Standards Board of India, at the Rotary Club, Belgaum on November 21, 2008.

Towards Awarness

1. In organising this public meeting, the Rotary Club of Belgaum has contributed significantly towards empowering individuals and MSEs, as empowerment can come only if there is awareness of one’s rights. The Rotary Club of Belgaum therefore, deserves fulsome praise and the gratitude of all present here for organising this meeting. I was informed that the gathering would like to know briefly about the current scenario of the Indian economy and therefore, I will begin by making a few remarks in this regard.

2. When the East Asian crisis engulfed all the Asian tiger economies in the 90’s, the Indian economy remained unscathed essentially because our macro-economic fundamentals were strong. With the progressive opening up of the Indian economy since the late 90s and increased trade and capital flows, our economy is more integrated into the global economy and hence more immune to a crisis that takes place elsewhere. Unlike the East Asian crisis which emanated in a particular region, the current global crisis is of a very different genre, emanating from an industrialized developed and dominant economy and therefore radiating powerfully throughout the world.

3. A financial Tsunami has engulfed the US. Four to five months ago one would have not believed that Bear Stearns, Lehman Bros., Merrill Lynch (investment banks), Fanny Mae & Freddie Mac (mortgage cos.), AIG (insurance company) would all fall like a pack of cards. There is now no investment bank left in the US, as the two largest which remained viz. Goldman Sachs & Morgan Stanley have converted to commercial banks. The U.K. too is having its own share of problems. Germany, France and Japan are already in recession. Russia is in financial turmoil. China’s economy is grinding down and it has just announced the release of a huge fiscal stimulus of $586 bn. and Brazil, Mexico & Hongkong have entered into huge currency swaps with the U.S.

4. This financial Tsunami has also affected the Indian economy in many ways. The first blow is the stock market crash wiping out upto two thirds of the market capitalisation. The loss in the month of October 2008 itself is more than 25%. This was bound to happen as FIIs pulled out their investments. This has led to the nominal Rupee dollar rate depreciating, on an annualized basis, over almost 17% as on November 7, 2008.

5. If the Rupee depreciates it should mean good news for Indian exporters but in a world fighting financial fires, the markets for Indian exports are shrinking. Moreover, our exporters are finding it difficult as overcautious Indian banks are rejecting LCs or seeking higher charges increasing the LC cost by 1%. The same is the case with imports as banks are restricting their exposure. Our trade deficit is widening fast and therefore the current account deficit which has been in the range of 1 to 1.5% of GDP in the fiscal year 2007-08, is now around or over 3% of GDP. Our reserves which were almost $341 bn. in May 2008 now stand reduced to $240 bn.

6. On account of deleveraging by overseas banks, frozen overseas money markets and a general risk aversion all round, Indian corporates are no longer able to access ECBs and those maturing are not being rolled over. The capital expenditure plans of corporates have, in many cases, been put on hold. Moreover, those companies with overseas operations find that their overseas branches or subsidiaries are unable to raise finance in those markets.

7. As the RBI Governor, Dr. D. Subbarao states

“The equity and the forex markets provide the channels through which the global crisis can spread to the Indian system. The other three segments of the financial markets – money, debt and credit markets could be impacted indirectly …… and this impact is by no means insignificant or trivial. Indeed, it could intensify in the months ahead.”

8. The Indian economy, however, has not been affected to the same extent as some other economies because of the following positive factors :

(i) Our commercial banks are well regulated and have strong fundamentals i.e. they are well capitalized – the Basle Standards stipulate a capital adequacy ratio of 8% whereas the capital adequacy ratio of our banks are in the range of 12%. Their net non-performing asset (NPA) ratio is well within 2 - 3%. Their Current & Savings (CASA) deposits form 38.5% of total deposits (as on March 31, 2007). Banks have to maintain a Statutory Liquidity Ratio of 24% (it was 25% till October) and a Cash Reserve Ratio of 5.5% (reduced from 9%). In other words only 70% of their funds are available for lending.

(ii) Unlike other East Asian economies our economy is not totally export driven and we have a robust domestic demand.

(iii) Our corporates have healthy balance sheets – barring the recent losses or potential losses on foreign exchange derivative contracts.

(iv) Our savings rate is high at 34% and therefore, our investments are predominantly financed out of domestic savings.

(v) During April – August 2008 Foreign Direct Investment (FDI) flows were to the tune of U.S. $16.7 bn. as compared with US $8.5 bn. in the corresponding period of 2007 which suggests that overseas “confidence in Indian growth prospects remains healthy” (Deputy Governor Dr. Rakesh Mohan – RBI Bulletin November 2008).

9. To meet the demand for credit RBI has injected liquidity to the extent of over Rs. 3,00,000 crores. If, as it appears banks are still unwilling to lend – even to one another, the problem clearly lies elsewhere. That there is an industrial slowdown is accepted by all. What is, therefore, not clear is whether this liquidity is needed by corporates for growth or by market participants to tide over the larger problem of solvency. Here, I am tempted to say that even in normal times, public sector banks are wary of taking on what may appear to them as being excessive risk-taking but it is possible that they have reached their exposure limits to certain sectors and hence the slow-down. Also, mere increase in liquidity will not solve the problem of pessimistic expectations. Companies are adopting a wait and watch approach before starting new projects or continuing operations at full capacity. Providing credit at this stage may only lead to build up of inventories.

10. The RBI has also simultaneously taken several regulatory measures to ensure the growth momentum viz.,

i. Risk weights on bank exposure to the real estate sector and non deposit taking NBFCs has been reduced from 150% to 100%.

ii. Provisioning requirements for housing loans above Rs.20 lakh, which was 1% and provisioning requirements against standard advances in the commercial real estate sector, personal loans, credit card receivables, loans on capital market exposure and non deposit taking NBFCs which was 2% have all been reduced to a uniform level of 0.40%.

Both these measures have to be viewed against the background of prudential tightening of regulatory norms for these sectors by the RBI during boom years, which in turn has left scope for these counter-cyclical measures during the crisis.

iii. The ceilings on interest rates on FCNR & NRE deposits have been raised twice this month so as to attract NRI inflows.

iv. For exporters the period of entitlement on pre-shipment Rupee-export credit has been increased to 270 days from 180 days and export credit refinance limit has been enhanced from 15% of the outstanding Rupee-export credit to 50% - thereby providing an additional Rs.22000 crore to banks.

11. Despite the huge liquidity release and other measures taken by RBI to enhance forex and domestic liquidity and credit delivery, there are still demands for all sorts of monetary easing and release of forex reserves.

12. While opinion makers in the US are advocating easing of fiscal and monetary discipline to kickstart growth, the same may not be prudent for the Indian economy. Our actions of releasing a surge of liquidity in the face of a manufacturing and trade and even services (About 15 to 18% of the business coming to Indian outsourcers includes projects from overseas banking, insurance and the financial services sector, which is now uncertain) slow-down could possibly push up the inflation spiral, the effects of which will only be felt after the normal lag of say 12 months.

13. Against the backdrop of a clamour for more rate cuts and more liquidity and more regulatory forbearance from the captains of industry, capital market enthusiasts and real estate barons, one cannot hear the voice of the common man. Maybe he feels he has no voice at all! But he certainly has his rights vis-à-vis his bank and he ought to be aware of these, which brings me to the subject of customer service by banks to those at the bottom of the pyramid.

14. Although, since time immemorial, banks have recognized that customer service needs to be given attention, the overall quality of banking service to the common man fell far short of minimum standards. Therefore, the then Governor, RBI, Dr. Y.V. Reddy made improved customer service to the common man, one of the key objectives of the RBI and pursuant to this the Banking Codes and Standards Board of India (BCSBI) was set up in February 2006 as a collaborative effort between the RBI, the Indian Banks’ Association (IBA) and the banking industry for setting minimum standards, increasing transparency, achieving higher operating standards and above all, providing cordial banker customer relationship so as to foster confidence in the banking system. BCSBI functions as an independent and autonomous body to ensure that consumers of banking services get what they are promised by member banks.

15. In July 2006, BCSBI launched it first Code of Bank’s Commitment to Customers which, in a sense, is the Charter of Rights of the Common Man vis-à-vis his bank. The Code sets out minimum standards of banking practices for banks to follow and covers all products and services, like deposit accounts, remittance facilities, Government transactions, Note Exchange Facility, safe deposit locker facility, loans, foreign exchange transactions etc. offered by banks to individuals. It emphasizes on transparency in banks’ dealings with its customers. To achieve the avowed transparency, the Code provides for documentation of banks’ fees and service charges, in the form of a Tariff Schedule which is required to be displayed on the bank’s website and in each branch. The Code also gives a right to customers to peruse the Tariff Schedule free of any charge. The Code lays great emphasis on providing full information to the customer before a product or service is sold to him. For post sale conduct the Code insists on banks giving one month’s notice to the customer before making any change in their tariff schedule or any change in terms and conditions, governing the product, which may adversely affect the customer.

16. The cardinal principle that runs across all the provisions of the Code is that banks should not rely on implicit consent from customers and all products and services should be sold to the customer only after obtaining his explicit consent in writing. As a logical corollary of this principle, the Code prohibits banks from providing unsolicited credit in any form including credit cards. The Code addresses the issue of Right to Privacy of customers as also the Right to confidentiality of client information. Banks have committed that information not essential for account opening would be sought from their prospective customers, separately, only on voluntary basis and that they would not part with personal information collected by them, for any commercial purpose without seeking the prior consent of the customer.

17. In keeping with the Code commitments, banks now have a Cheque Collection Policy, Compensation Policy, Grievance Redressal Policy, Collection of Dues Policy and Security Repossession Policy and all these are in public domain.

18. The Code is applicable to third party products sold through bank branches and the banks are under obligation to ensure that their Direct Sales Agents also comply with the provision of the Code.

19. Having evolved a Code for the common man, the BCSBI has focused its attention to others at the bottom of the pyramid, namely the Micro and Small Enterprises (MSEs). In India, the small-scale industry sector has remained high on the national agenda as it generates employment, contributes to regional dispersal of industries and is a seedbed for entrepreneurship and more importantly makes a significant contribution to exports. Anecdotal evidence, however, reveals that MSEs are unable to reap the benefits of the plentiful government schemes, because of their inability to access bank finance and receive adequate and transparent banking services. In fact, even though there has been continuous and significant credit expansion in the last few years, the share of bank credit to MSEs has been the lowest among all the segments. This is also borne out by the results of the Third Census of Small Enterprises, conducted by the Government of India in 2001-02, which revealed that 95.5% of MSEs have been outside the purview of the banking system. The 11th 5-year Plan Approach Paper states that the situation regarding finance for MSEs is worse than for farm credit. Keeping in view the concerns of the Government and the RBI in ensuring easy access to bank finance to the lower strata of society, the BCSBI, in collaboration with banks and IBA has evolved a Code of Bank’s Commitment to Micro and Small Enterprises (MSE Code), which was released by the Hon. Finance Minister in May 2008.

20. Through the MSE Code, banks have voluntarily committed to provide easy, speedy and transparent access to banking services to their MSE customers in their day-to-day operation and in times of financial difficulty. To ease credit flows, a standardized loan application form applicable across all banks, accompanied by a Check-List of documents that may be required (bank specific) has been introduced. A time bound programme has been fixed for disposal of loan applications, disbursal of loan amount, increase in drawing power and for, dealing with rehabilitation packages. Banks have committed to transparency not only in fees and charges but also in sharing with the customer the parameters on which the enterprise will be rated. These and several other commitments which have been made voluntarily by banks are expected to benefit both banks and MSEs.

21. At a time when the cost, availability, and delivery of credit are the subject of considerable political and public debate and concern, it is all the more necessary to ensure that the banking rights of those at the bottom of the pyramid, - the common man and the micro and small enterprises which include the carpenter, plumber, fitter, hand-cart puller, tailor, trader, dhabawalla & dabbawalas etc. – are protected. The two Codes, no doubt empower these customers but it is equally necessary for these customers to be aware of their rights and fight for them. If your complaint is not redressed to your satisfaction by the bank within a month of your complaint you can approach the Banking Ombudsman whose name and address is required to be displayed in each bank branch. A consumer of banking service can also get his grievance redressed by the Consumer District Forum (jurisdiction upto Rs.20 lakh) or the State-level Redressal Commission (between Rs.20 lakh to Rs.1 crore) or the National Consumer Redressal Commissions (NCRC). Two judgements of the Supreme Court are worth citing:

(a) In one case the Supreme Court laid down that it is the banks' prime duty to scrutinise every client who comes for a loan and assess his credit worthiness. If the basic work of selection and assessment itself is shoddy and consumers are lured to take loans, which they may not really need or are beyond their repaying capacity, then, clearly banks need to justify their actions for recovery.

(b) In another case the Supreme Court held: "Nothing is more damaging than the feeling of helplessness. An ordinary citizen instead of complaining and fighting, succumbs to the pressure of undesirable functioning in offices……… Therefore, the award of compensation not only compensates the individual, satisfies him personally but helps in curing social evil. It may result in improving the work culture and help in changing the outlook.”

22. Judgements such as these and the exemplary Compensation awards given by the National Consumer Redressal Commission have not only boosted the flagging morale of the individual customer but also motivate institutions like the BCSBI to continue with their uphill task of rectifying deficiencies in the banking system in a collaborative manner.

In conclusion, I would say that yes – these are difficult times but there is certainly no need for “irrational pessimism” as Mr. Deepak Parekh puts it. Perhaps the most debilitating impact of the current financial crisis is the loss of confidence and a lurking fear that the worst is not yet over. If you keep crying over the door that has closed you probably will not be able to see the window of opportunity that is open. There are still overseas sovereign funds, pension funds, hedge funds and rich people who are wondering where to invest. India and China are doing relatively much better than other parts of the world. India’s expected growth rate next year is around 6% which is far better than other economies of the world. Let us, therefore, not sit back with a death wish. There is no cause for glee but there is no cause for gloom either. All we need to do is understand what is happening and be aware.

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