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Wednesday, July 27, 2005

Ex RBI GM K.Vijayraghavan comments

Deccan Herald » Economy & Business » Detailed Story



RBI’s proposed norms may ease life for cardholders

The RBI has come out with a draft guideline for credit card issuers, but how far this is implementable is the moot point, says K Vijayraghavan.

The Reserve Bank of India (RBI) has recently come out with a draft guideline for the issuers of credit cards. The guidelines have been issued in the wake of complaints of harassment and ill-treatment meted to card holders particularly at the time of recovery.

The first issue that juts out is that issuers, viz., banks and NBFCs have been made liable for the actions of their direct sales agents (DSA). The issuers have been told in very unmistakable terms that the agents will have to comply with the norms of KYC (know your customers). What this essentially means is that the background of the customer should be thoroughly screened by the agents before issuing cards. The intention is laudable, but implementation is not easy.

It is not clear as to what options are available to issuers in case agents fail to fulfill the mandate. Well, the agency can be terminated, but it is only curative and less preventive. In other words, there appears to be a need to spell out more clearly the issues that could crop up in this area which would need to be settled between issuers and agents or how complicated problems can be sorted out and solutions enforced on the agents if necessary.

The Banking Ombudsman will look into complaints from holders or issuers. But it is not indicated whether disputes between issuers and agents fall within the ambit of Banking Ombudsman. Appointing DSA is part of outsourcing activities which banks do. But the extent of risk involved in this exercise needs to be carefully measured. The issuers of cards will do well to keep this in mind and ensure that their agents are kept under strict surveillance. A larger issue is: whether outsourcing is desirable everywhere and anywhere may also worth debating.

Fixing credit limit

The guidelines say that the drawing limit for cards should be fixed by issuers after taking into account the fact that there is no prohibition on a person getting several cards, which will increase his drawing/borrowing power. The intention, again, is commendable, but one point needs clarification. What is the mechanism available to issuers to obtain information on the number of cards (and their drawing power), a person has? Will a declaration from the applicant be sufficient? What is the option available to issuers if an applicant suppresses such information? We are in a super computer world, and the death of distance has already been brought about. Can there be not a centralised agency where full details of cards issued by all agencies can be pooled? It should also be possible to plug loopholes in such a system where a person tries to obtain card under different names or by differently spelling his name.

Making calls

A number of protective clauses are seen in the guidelines from the point of card holders, particularly in regard to levying of interest, wrongful billing etc. This is no doubt welcome. It is also desirable to ensure that unsolicited calls are not made to customers and unsolicited cards are not issued as said in the guidelines. Maintenance of a “do not call registry” has been prescribed to be maintained by issuers. The agents are to be told by issuers that only those calls which are cleared by the latter should be made to customers. But, what will be the position in the case of calls made to a card holder who prefers to treat even a recovery call as an unsolicited call which is non-permissible and accordingly takes objection. How can the issuer or agents prove that it was not an unsolicited call? It will not be out of context to mention in this connection that making unsolicited calls have become a part of marketing strategies, and some foreign banks make such calls to offer loans.

Information protection

Considerable protection also seems to have been extended to card holders with regard to confidentiality of information. The issuers have been told that they should be very discreet and selective while passing on information about card holders to agents. It is said that “personal information provided by the card holder but not required for recovery purpose should not be released” by the issuers to agents. If the issuers make the agents fully responsible for recovery, stipulating such conditions may ultimately create problems for the issuers. The question will also arise as to who will be responsible to decide what all information about cardholders can be released or should not be released to agents by the issuers.

Recovery

It is not inconceivable that somebody asks for a list of dos and donts in this regard, which may not be very easy to prepare. The guidelines also say that neither the issuer nor the agents shall cause harassment of any kind to any holder while effecting recovery. It is known that certain cardholders get rough treatment at the time of recovery. There is no doubt that authorities effecting recovery should not take law into their hands while carrying out their duties. At this juncture, it is necessary to ponder as to how banks have been effecting recovery of normal advances. The situation is no different in the case of credit cards....Perhaps it may be advisable to bring in the concept of “willful defaulters”, who fall in a different category. This is a tricky and partially risky area and is double-edged. Putting such instructions in black and white as also not doing so are both trouble-inviting strategies. Needless to say all cases of credit card defaults cannot be taken to court either. Whatever may be the suggestions or disagreements one may have about the guidelines, instructions from RBI will have to be given due importance by all concerned. The point, however, is that instructions coming from RBI have statutory backing and are more or less mandatory. This being the case, RBI would also like to consider whether some portions of the guidelines could have been issued by Indian Banks’ Association (IBA).

No doubt, the guidelines have thrown lot of light on many grey areas. Nevertheless, issuers and agents will always be interested and rightfully so, in getting their money back. Their interests also need to be protected because, ultimately, here also depositors money is involved.

One may not be able to visualise hundred per cent recovery position for credit cards, but many of the problems which cropped up in this area have been to a significant extent, caused by the haphazard and untrammelled way in which credit cards were issued.

Proper appraisal

It would be interesting to conduct as study to ascertain whether default level and also the various other problems are more in the case of customers or non-customers. There is reason to assume that they will be more in the case of non-customers. If so, it would prove beyond doubt that lack of proper appraisal and examining the need to possess a credit card have given rise to the present state of affairs.

In the name of retailing, banks have perhaps compromised on certain cardinal issues thereby glossing over the inherent risks associated with retailing. Let me again quote the RBI deputy governor who said “While retail banking offers phenomenal opportunities for growth, the challenges are equally daunting.

How far retail banking is able to lead to growth of banking industry in the future, would depend on the capacity-building of banks to meet the challenges and make use of opportunities profitably.” This being so, RBI may like to consider whether banks need to be advised in unambiguous terms that they should put more emphasis on proper appraisal before issuing credit cards.

The writer is a retired Chief General Manager, RBI. E-mail: k.vijayraghavan@gmail.com

CIBIL and the Law

"Do not intimidate credit card holders"

Special Correspondent

Reserve Bank issues draft guidelines to banks, NBFCs

MUMBAI: The Reserve Bank of India has stated that banks and finance companies issuing credit cards should not resort to intimidation or harassment to recover dues.

"The banks or non-banking finance companies (NBFCs) and their agents should not resort to intimidation or harassment of any kind either verbal or physical against any person in their debt collection efforts, including acts intended to humiliate publicly or intrude the privacy of the credit card holders' family members, referees and friends, making threatening and anonymous calls or making false and misleading representations," the RBI said in its draft guidelines on Credit Card Operations issued here on Tuesday.

When banks outsource credit card operations, they had to be extremely careful that the appointment of such service providers did not compromise with the quality of the customer service and the bank's ability to manage credit liquidity and operational risk.

In the choice of the service provider banks had to be guided by the need to ensure confidentiality of the customer's records, respect customer privacy and adhere to fair practices in debt collection.

`Follow procedures'

Before reporting default status of a credit card holder to the Credit Information Bureau of India Ltd (CIBIL) or any other credit information company authorised by the RBI, the banks might ensure that they adhered to a procedure, duly approved by their board, including issuing of sufficient notice to such card holder about the intention to report him/her as defaulter to the Credit Information Company.

Banks need to Educate Card Users.

In search of friendly recovery measures
PREETI R IYER
Friday, July 15, 2005 at 0000 hours IST

As American business tycoon John Paul Getty rightly pointed out, “If a customer borrows $100 from a bank, it’s the customer’s problem. But if he borrows $100 million from a bank, then it is the banker’s problem!”

Increasingly, the rate at which credit card dues are piling up, it now seems more like a bankers’ problem than the borrower’s. Competition within the industry has forced card issuers to go for massive countrywide expansion, compromising on the due diligence of issuees.

Lack of awareness about various conditions, including charge of high interest rates (between 20 and 40% per annum) and roll-over of outstandings lead the cardholder to commit frequent defaults and fall into the debt trap. Since credit card exposure is an unsecured lending, recovery remains a challenge for the credit card issuer.

Several measures could help salvage the situation. The establishment of the credit bureau (CIBIL) provides a unique opportunity to improve the screening of new applications and banks plan to fully avail of this service to spot the defaulters. Banks are sprucing up various methods to try and identify the potential risks a customer carries and accordingly, issue cards to applicants.

Says HSBC’s head-personal financial services India, Nicholas Winsor, “This helps safeguard the quality of the bank’s portfolio. We also refer to various sources that might indicate a history of delinquency, an attempt aided by the credit bureau. Based on portfolio data, we do identify segments which are not performing well and restrict these cases.” Another route banks adopt is to provide credit card users the facility of converting outstandings into a personal loan, payable via EMIs at lower interest rates.

Standard Chartered Bank attempts to ensure high portfolio quality by deploying scoring models and advanced portfolio management techniques. Explains the bank’s head-consumer banking-India and Nepal, Murali M Natrajan, “We process new applications through scoring, verification, negative database, telephone and residence verification. We also have experienced underwriters who are able to spot fraud attempts.”

Of late, the methods of recovery of credit card dues from defaulting customers deployed by banks have become a matter of immense concern for the banking regulator, Reserve Bank of India and various consumer forums. In this regard, banks typically follow a recovery procedure beginning with written communication, reminding a customer about outstandings, along with a phone call. Banks also claim that after an adequate period of time along with series of reminders, bank representatives help the customer plan his repayment schedule, including financial counselling to ensure that the customer avoids the debt trap.

However, HDFC Bank’s vice-president and head-product and portfolio, credit cards, Parag Rao opines, “The number of customers in India maintaining outstandings against credit cards is still well below international levels, and most of them pay their dues within the stipulated time.”

However, there is more to it than meets the eye. Banks also need to acknowledge the fact that they do need to play an educative role by helping customers manage credit in a wiser manner. In this pursuit, banks have started using various methods to reach out to the masses, be it via booklets, manuals, internet or on-ground initiatives. These convey to the customer how he can avoid falling into the debt trap by managing his credit prudently. In a bid to reward customers with prompt payment track records, banks try and give these customers added benefits and a favourable interest rate structure. At times it becomes imperative that punitive measures and corrective steps be taken, well ahead of time before it becomes too late.

Credit card issuers also need to adopt measures which will help them reach out to the customer in a better manner. The aim should be to lend a personal touch to the banker-customer relationship, wherein the customer is made aware of his needs, responsibilities and privileges.

Credit Cards: RBI's Houdini Act. (Smoke & Mirrors)

Finally, relief for credit card users

Niranjan Krishnan | July 02, 2005 14:59 IST

In a welcome move that will wipe the frown off the face of many credit card holders, the Reserve Bank of India has proposed a set of guidelines to regulate credit card operations in the country.

The draft of the guidelines is presently placed in public view for feedback from various stakeholders. They will be finalised in the next few months and come into force for implementation by the end of August.

The scope of the proposed guidelines spans a whole gamut of credit card operations, touching upon card issuance, interest assessments, billing, customer rights, information-privacy and confidentiality, debt collection practices, outsourcing activities and redressal of customer grievances.

Some of the creditable and consumer-friendly features of the proposal are:

* The terms and conditions of the credit agreement should be disclosed in clear and simple language in all important communications to the customers. A listing of key items to include in those communications is also provided in the guidelines.
* The interest calculations must be explained with illustrations in each billing statement dispatched to customers.
* The credit card companies should send their billing statements without delay and customers must be given at least 10 days for settling their bills before interest assessments can kick in.
* Personal information of customers should be held confidential and cannot be shared with third parties.
* An Internet-enabled "Do not call registry" must be maintained by credit card companies to give consumers the choice of opting out of unsolicited phone calls and SMS messages.
* Debt collectors should not resort to verbal or physical intimidation or harassment of cardholders, their friends and family.
* The credit card companies are liable for the actions of third parties hired by them for sales or collections.
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Customer complaints should be resolved within 60 days.

The RBI guidelines, though covering a lot of ground, however, are not free from their baggage of controversies, limitations and omissions.

The credit card companies are now authorised to issue the plastic to only those consumers with independent financial means. The card issuers are explicitly forbidden from signing up students into their portfolio.

Expectedly, this rule has been greeted with consternation by the industry. It will elicit a similar disapproval from the student population and is also bound to take some fun out of their ephemeral and insouciant school life.

There is a provision that implies placing credit limit restrictions on customers holding multiple credit cards. It appears a tad gratuitous, if not officious, on the part of the regulator to make such a rule or recommendation.

While it is reasonable to prohibit the issuance of credit cards to minors, criminals and anti-nationals, the right of approving otherwise bona fide customers should remain with the risk taker and not the regulator.

By the same token, the number of credit cards and total spending limit to approve or avail of, are decisions best left to card issuers and their customers.

Both these stipulations appear ill-advised and smack of over-regulation that hinders than helps the interest of card issuers and consumers. Only a fence is needed between the two parties so that they can stay within their limits and do business with each other. Not a fortification that could stifle them both.

These two controversial provisions will hopefully be modified before the guidelines are released for implementation.

Issues concerning unsolicited offers, identity theft and fraud do not appear addressed adequately by the present batch of guidelines:

* There is a ruling that states that unsolicited credit cards should not be generally issued but it stops short of prohibiting such a practice. Sending unsolicited credit cards to customers' doorsteps is an unwarranted allurement that could set them up for a debt trap. It would be expedient to tighten the rule further and strictly bar such an entrapment tactic.
* There is no mention of the liability of credit card issuers to customers in case there is leakage or loss of customer information, or theft of customer identities due to weakness in their customer information storage and processing. Fixing the liability of card issuers for customer damages stemming from internal operational failures would further reinforce the rules on information privacy and confidentiality.
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In case a credit card is lost or stolen, the customer is usually held liable for any unauthorised charges made from the time of loss to the deactivation of card by the company following customer's report. As it happens in developed countries, an upper limit needs to be placed on the extent of the customer's liability since the card issuer, too, has the responsibility of managing fraud risk by diligently scanning out-of-pattern behaviour while approving transactions at the point-of-sale.

One overarching theme that did not get sufficient attention in the guidelines is the specification of penalties for their violation. Given that grievance redressal is a tardy and, at times, tormenting process in India, especially for consumers who often lack the awareness and resources, setting a stringent minimum threshold for penalties upfront can go a long way towards motivating the card issuers in following the guidelines in their day-to-day operations.

On the other hand, the critical issue of card issuers making uninitiated and unwanted contacts with customers could possibly be resolved more efficiently than the arrangement envisioned presently.

The rules propose an internet-enabled "Do not call registry" to be maintained by each and every card issuer to give customers the choice to be excluded from solicitations.

This entails customers individually contacting every card issuer in the country, a cumbersome task given the proliferation of card issuers in the country. Also, there will be replication of efforts by card issuers whose resources could be more gainfully deployed in other value-adding activities.

A more efficient mechanism for enabling customers to opt out of solicitations would be to maintain the registry in a central location accessible to both card issuers and consumers.

Credit bureaus such as Credit Information Bureau of India Ltd. (Cibil), which maintain a record of all credit consumers, could provide a perfect platform for this purpose.

Entrusting the credit bureaus with maintaining the "Do not call registry" can also address another such "excuse me, please" issue not taken up by this initiative. Not only can customers opt out of unsolicited phone calls, they can also be given the right to make their credit file inaccessible to lenders making unsolicited offers through other channels like mass-mailing, which is another matter that would need to be addressed at some point in time.

This proposal does not also cover the issuance of credit cards to consumers because their employers require it done. This matter opens up a few grey areas where the regulatory lakshman rekhas between different parties need to be drawn, and could perhaps be a subject of the next round of regulations.

Overall, the most glaring limitation of the present set of guidelines is that they are expressly confined to credit card operations. A majority of the regulatory gaps the guidelines help in filling are also common to other credit schemes available in the market such as vehicle loans, home loans, and personal loans.

The RBI can consider broadening the scope of the guidelines to apply for all other credit products and facilities depending on the pertinence and possibility of application.

In summary, although the proposed set of RBI guidelines on credit card operations has some wrinkles to be pressed out, it will undoubtedly serve as a first solid pass of the steamroller in levelling the playing field and promoting an equitable balance between credit card issuers and their customers.