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Needed: A retail borrowers' union to stop banks from cheating customers

Joydeep Ghosh / 08 Nov 17 | 12:34 PM

The government’s Rs 2.11 lakh crore recapitalisation of banks is a laudable effort. After all, several sections of the economy are being starved of cash as many banks are unable to lend due to their stressed balance sheets. 

The question: Who will benefit the most from this recapitalisation? Bankers believe that the small-and-medium scale enterprises (SME) will benefit the most as it will enhance their job-creating ability. 

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It would seem that the NDA government, for the first time perhaps, is admitting that demonetisation did lead to job losses, especially in the SME sector.

There may also be an admission that the multiple headline-grabbing plan of taking big corporates to the National Company Law Tribunal to recover loans isn’t going to be a cakewalk. And the haircuts may be significant, and asset sales may take a long time. 

Since the government seems to be in a benevolent mood, maybe it should also start redressing issues of the retail borrower. This segment suffers the most at the hands of banks. A recent report by Reserve Bank of India (RBI)’s Internal Committee, which was set up to review the working of the Marginal Cost of Funds-based Lending Rate System, points out banks have been treating its retail customers extremely shabbily for years. 

The scathing report has many important pointers for the government, if it is interested. The Internal Committee of the RBI studied four major banks (two public and two private) and found that one major public sector bank decided on the MCLR rate, based on card rates of retail term deposits of seven days to one year. It fully ignored the CASA deposits, which formed a significant portion of the total deposits of the bank. Current account deposits and savings account deposits earn zero interest and 3.5-6 per cent interest, respectively. Note: This is a public sector bank. 

The performance of private banks was no better. A private sector bank’s base rate in March 2017 was 80 basis points higher than suggested by the base rate formula. The cost of deposits of another declined by 120 basis points between Q3 FY17 and Q4 FY17 but the decline in base rate was nominal. As a result, the bank’s return on net worth increased 100 basis points. 

There are many such dreary tales. Some have even flouted the guidelines of the apex bank by having multiple rates instead of having one MCLR across products. This was done by using different operating costs for different loan products. Even after introducing the MCLR for 18 months, almost 30 per cent of loans were not linked to it. The worst part: Despite shifting from base rate MCLR, interest rates charged to some customers rose by as much as 300 basis points – remember, in the last 18 months, interest rates have been on the decline. 

Yes, many banks’ margins have been under pressure and non-performing assets have been bloating. Many of these troubles can be attributed to difficult conditions in the economy, and some cases, even suspicious lending decisions to select companies. But should only retail borrowers be made to pay for the economy’s or banks’ troubles?

The RBI’s Internal Committee has recommended linking the rates to a market rate such as repo rate, certificate of deposits or treasury bills for better transmission. But what happens to customers who have been cheated by these so-called leading banks for years? It’s time for a forum which brings these borrowers together and takes the errant banks to court. The views expressed are the writer's own.

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