Present status of Consumer Protection in Indian Banking Sector

Posted On - 11 November, 2019 • By - Akshay Ramesh

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 in Indian Banking Sector

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 cybersecurity
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:

  • Right to Fair Treatment
  • Right to Transparency, Fair and Honest Dealing
  • Right to Suitability
  • 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”)[1] 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[2].

Role of Banks 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 unauthorised 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.
  • Sensitising
    frontline staff of banks on the importance of customer service.
  • Bringing
    about continuous systemic improvement by root cause analysis of
  • 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.

Recent Development in Banking Sector which has escalated the Consumer

It can be said that Article 21 of the Indian
Constitution is the main theme behind the evolution of consumer protection laws
in our country. The Right to Privacy is the stepping stone of the consumer protection
laws in our country because every customer has the right with respect to their
personal choice. At the same time, the service providers have the inbound duty
to protect the ‘Right to Privacy’ of their valuable customers. Highlighting the
same, the High Court of Kerala referring to the case of District Registrar and
the Collector v. Canara Bank[3], has held that, ‘Demanding information about bank accounts without
statutory backings violates Right to Privacy.

The Kerala High Court upheld the same by stating that
the demand of details pertaining to the bank account of a person shall amount
to infringement of Right to Privacy. So, this has created a positive hope
amongst the banking customers about banks which are now duly responsible in
maintaining the privacy of its customers and uphold the validity of Right
privacy enshrined in the Indian Constitution. 


RBIs efforts in
upholding the Consumer Protection in the Banking sector can be yielded only if
the citizens are made aware of entire grievance redressal structures and their functions
thereupon. People have to be educated about the procedures for lodging
complaints especially the grounds of complaints under the various Ombudsmen
Schemes. Therefore, creation of public awareness from grass root level about entire grievance
redressal structures is in inevitable. For which both RBI and the Central
Government of India have to coordinate with each other to infuse certain policy
measures into the Indian banking sector.

Since the
banks are under the obligation to maintain the secrecy of information unless
disclosure of the same is required by law, it must be well understood that the
Right to Privacy is not lost as a result of confidential information being
parted by customers to the custody of the bank

Hence, the
development of the overall banking sector in our country depends on how
effectively the banks maintain the fiduciary relationship with its customers.

Contributed By – Akshay Ramesh, Associate
Gokul. L, Associate

King Stubb & Kasiva,
Advocates & Attorneys

Click Here to Get in Touch

New Delhi | Mumbai | Bangalore | Chennai | Hyderabad | Kochi
Tel: +91 11 41032969 | Email: