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banking_law:notes:consumer-protection

Consumer protection under Banking Law

The need and importance of the consumer protection is expanding at a rate of knots especially in the Indian banking sector. We have encountered many incidents in the banking sector where the consumers are misled due to the failure of bank's operational capacities leading to the financial insecurity amongst the innocent customers. The recent example is the Punjab and Maharashtra Co-operative bank issue, wherein, the Reserve Bank of India (“RBI”) under Section 35(A) of Banking Regulation Act, 1949 imposed the regulatory restrictions and withdrawal restrictions upon the said bank due to its irregularities disclosed to the RBI, which in turn has affected the faultless customers.

Being the caretaker of the Indian banking sector, RBI has the due responsibility in establishing its strong and effective control over all the banks in India in order to provide the citizens of this land with a transparent banking system. To achieve this, the banks have to effectively coordinate with the RBI through initiatives, customer service departments, customer education departments, customer protection departments, banking ombudsman, etc.

Role of RBI so far, in the creation of a vital consumer protection environment

From past few decades, the RBI has involved itself in strengthening the fiduciary relationship between the banks and the customers as it holds the responsibility of maintaining the financial health in the Indian banking sector. At the same time RBI has a major duty in building up a strong consumer confidence amongst general public by ensuring the stability and the safety in the Indian Banking System.

When previous works of RBI are traced, we can note its efforts in introducing Banking Ombudsman (“BO”) Scheme 2006. BO is an 'Alternative Dispute Resolution Mechanism' for resolving the disputes between a bank and its customers. As of today, there are 20 BO offices in our country. However, the Indian Banking Sector is simultaneously exposed to innumerable known and unknown risks and uncertainties such as cyber security breaches, phishing/ vishing frauds, data thefts, misuse of data, data privacy breaches, malware attacks, etc. While it is known that these risks exist, the garb in which they manifest, when and at what severity, is unknown. In this background, the role of the Ombudsman has become challenging as there is an increase in the number of complaints, their complexity, as well as the ability to deal with the dynamic financial environment. When we come across the recent initiatives of RBI in consumer education and protection, we find the formulation of the 'Charter of Customer Rights' which includes 5 basic rights of bank customers. They are:

  1. Right to Fair Treatment
  2. Right to Transparency, Fair and Honest Dealing
  3. Right to Suitability
  4. Right to Privacy Right to Grievance Redress and Compensation

Also, RBI has done a prominent job by setting up the Customer Service Department in 2006 to act as the nodal department in the RBI for grievance redressal of complaints received from the public. The department is renamed as Consumer Education and Protection Department (CEPD) and continues to focus on providing a level playing field between suppliers and consumers of financial services, by easing the imbalances arising from information irregularities, inadequate disclosures, and unfair treatment.

An important milestone in strengthening the grievance redressal mechanism available to bank customers was the institutionalisation of the Internal Ombudsman (“IO”) mechanism in 2015 in all public sector banks, selected private sector and foreign banks. Now, the coverage of the “IO” Scheme is extended to all scheduled commercial banks (other than Regional Rural Banks) having 10 or more banking outlets in India. The objective of setting up the “IO” is to ensure that an undivided attention is given to the resolution of customer complaints in banks and the customers of banks get an independent and auto-review of their grievances which are partially or wholly unaddressed before they approach the BO.

On the other hand, recently on 24 June, 2019 RBI launched a software application called Complaint Management System (“CMS”) in order to effectively support the Ombudsman framework 2006. Now, the citizens can access the CMS portal at RBI's website to lodge their complaints against any of the entities regulated by RBI. With the launch of CMS, the processing of complaints received in the offices of Banking Ombudsman (“BO”) and Consumer Education and Protection Cells (“CEPCs”) of RBI has been digitalized.

Role of Banking Service in Consumer Protection

Banks not only need to make sufficient disclosures on all aspects of their functioning and operations but also have to play a proactive role in educating customers on the products offered, the operational techniques, risks involved, safeguards and redressal options available. Banks need to maintain transparency in pricing, service charges, fees, and penalties. Every bank has to ensure the following in order to build a secure environment for the customers:

  • Limiting the liability of customers in unauthorized electronic banking transactions.
  • Enforcing ethical behaviour by financial service providers under the regulatory purview of the RBI.
  • Emphasis on “Consumer Education” - Advertisement campaign on fictitious offers/fund transfers, coordination with the cyber-crime department, etc. Spreading awareness about Banking Ombudsman in rural and semi-urban areas. Improving the internal grievances redress mechanism of banks for effectiveness and timely response. Sensitizing frontline staff of banks on the importance of customer service.
  • Bringing about continuous systemic improvement by root cause analysis of complaints. Review of the BO Scheme in the light of emerging changes in the environment. Conducting thematic surveys and studies on specific areas. Monitoring implementation of the Charter of Customer Rights.

Banks Held Liable For Deficiency in Service

In a large number of cases, banks have been pulled up for deficiency in service and compensation has been awarded to complainants by the Consumer Courts. Some of the important Cases are analysed hereunder:

Wrongful dishonour of Bank Draft

SBI vs. N. Raveendran Nair, the issue before the National Commission was that the bank refused to encase the demand draft on the ground that the signature of one of the two officials of the bank was missing. The State Commission held that the dishonour of the draft was due to the fault of the bank, and therefore, there was deficiency in service by the bank. A compensation of Rs. 19,500/- was awarded by the Commission for the inconvenience and mental agony caused. The National Commission dismissed the appeal of the bank against the judgment of the State Commission.

Non-credit of cheque collected

In Sovintorg (India) Ltd. vs. SBI1) the issue before the Supreme Court was that the proceeds of the cheque deposited with the bank for collection were not credited to the account of the complainant though the same were collected by the bank. The State Commission awarded only interest of 12 per cent for withholding of the customer’s money against the complainant’s claim of 24 per cent interest and payment of compensation. The National Commission, on appeal by the complainant, confirmed the order of the State Commission. On further appeal before the Supreme Court by the complainant, the Apex Court partly allowed the appeal by directing the payment of interest at the rate of 15 per cent but refused the claim of payment of compensation on the ground that the allegation of negligence was not proved.

Non-issuance of proper receipt

Where the bank did not adjust the loan repaid in its books nor was issue proper receipt to the complainant, the award of compensation by the District Forum for deficiency in service confirmed by the Chhattisgarh State Commission in Jila Sahakari Kendriya Bank vs. Sarda Ram Nayak.2)

Payment of lower rate of interest

In Abha Bhanthia vs. SBI, the complainant had made an F.D. with the bank, which carried interest at the rate of 11.25 per cent as per the receipt issued. On maturity, bank paid lower interest @ 10.5 per cent. It was stated by the bank that the said rate of interest was the prevailing rate as per the directives of the RBI. The District Forum held that there was no deficiency in service by the bank as it followed the RBI directive. On appeal by the complainant, the State Commission held that the bank was obliged and under liability to pay interest as agreed by it and any omission or inadvertence on the part of the bank employees would not adversely affect the rights of the appellant depositor.

Default by bank’s agent

In UCO Bank vs. Surendra Kumar Bara3) the issue before the Orissa State Commission was that the complainant had opened an account with the bank under a scheme called Laghu Bachat Yojana. An agent of the bank used to collect the deposits from the complainant periodically and make entries in the passbook issued by the bank under his initial. The agent of the bank misappropriated a part of the money. The Commission directed the bank to refund the amount misappropriated by its agent along with interest and also to pay compensation for mental agony, harassment and cost of litigation.

Interest not paid on excess amount deposited in violation of PPF rules

In a rather interesting case in SBI vs. P.S. Krishnan4) the Tamil Nadu State Commission was asked to adjudicate upon a case where the complainant had deposited a sum of Rs. 8, 50,000/- in his PPF a/c during the F.Y. 1995-96. After a lapse of time, the bank informed the complainant that interest on the PPF a/c would be given on a total sum of Rs. 60,000/- only. The bank returned Rs. 7, 90,000/- to the depositor without any interest. It was contended on behalf of the bank that the deposits in the PPF account are credited to the government account and do not form part of the bank’s deposits. As per the rules of the PPF account, the maximum limit of deposit is Rs. 60,000/-. The bank is bound by the rules and is not liable for the alleged deficiencies in service. It was held by the Commission that the brochure issued by the Directorate of small savings clearly stated that the deposits up to Rs. 50,000/- will qualify for deduction of income tax under section 88 of the I.T. Act and the interest on the balance held in the PPF account is absolutely free from tax. The act of the bank in retaining a huge sum of Rs. 7, 90,000/- for nearly a year and returning it without interest is definitely an unjustified act. The Commission also held that the banks entrusted with the public money are in the position of a bailee and they have to function with caution and care that is expected of a bailee.

Even if the complainant was ignorant of the rules, the bank authorities ought to have been more vigilant when such a huge deposit was received by them. The Commission went to the extent of saying that the banking authorities had gone against the professional ethics in denying the interest, which the complainant was legitimately entitled to. The Commission also held that to retain one’s money and deny that person the right of interest on that amount would definitely amount to “unfair trade practice” and fall within the purview of the Consumer protection Act even otherwise.

1)
1992 1 CPR 76 NCDRC
2)
2004 (2) CPJ 534
3)
2004 (3) CPJ 472
4)
2004 (2) CPJ 579


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