Sucheta Dalal :Whose money is it anyway?
Sucheta Dalal

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Whose money is it anyway?  

Sep 18, 2006

The message from hundreds of emails that hit my mailbox every month suggest that bank customers have two major grievances against modern day banking — there are too many confusing and unreasonable charges and that their systems and procedures are one-sided, structured to suit only their convenience and consequently anti-customer.


The first problem is being addressed by an Reserve Bank of India (RBI) committee on reasonableness of bank charges. But I had an eye-opening, first-hand experience of the second problem in two separate mortgage finance cases last week. Both incidents happened at the same high-profile bank. I have decided not to name the bank only because it reacted instantly and plans on changing its “procedures” and one-sided policies. Also, I have not checked if this service standard is the norm.


In the first case, Borrower X had all but repaid her loan. A couple of weeks before the last EMI (Equated Monthly Installment) was due, she was told that her documents would be released a couple of weeks after the last payment. Great so far.


Instead of the usual EMI of Rs 50,000, her account was due to be debited for Rs 17,000, which was the residual loan repayment. She checked her account on September 10, and found a full Rs 50,000 lopped off. Rattled, but assuming it was a mistake, she called the bank and was in for a surprise. A senior executive told her it was “standard procedure” for full payment to be debited and the excess money collected — Rs 33000 in this case — would be returned to her when the account was closed out a couple of weeks later.


On escalating the matter even higher, she met with a slightly irritated repetition of the same explanation: “This was normal procedure”. But the “procedure” was created by the bank for its own convenience and was against the interest of customers! As a special concession, this excess debit was going to be reversed immediately. But what is shocking indeed is the fact that senior officials were so fixated on their own “procedure” that they failed to see that their unilateral action amounted to expropriation. And it irritated bank officials when the customer said that she felt “cheated by the bank”.


Why were intelligent bank officials unable to see the customer’s perspective? What if the customer had transferred a big chunk of her savings account balance to a Fixed Deposit, since she expected a much smaller debit from her savings account as the last EMI? Would her cheques have bounced? Or would she be penalised for not maintaining minimum balance? Clearly, yes. After all, if many customers objected to the practice it would have been changed a long time ago.


If banks have the technology to divide even Rs 10,000 credit card payments into 3 EMIs and recover them from customers without additional costs, why could the mortgage system not flag off loans that were scheduled to be fully repaid? Why are closing out documents not retrieved and kept ready so that the correct EMI is deducted? In fact, this would give the bank an opportunity to woo the customer (especially one with a good credit history) for fresh business.


Things fell into place once the matter was escalated to the CEO and the good news is that the bank plans to implement all this in the next 90 days. In the same week, customer Y had completed loan sanction procedures and was on the verge of signing the purchase agreement with Seller Z who was a non-resident Indian. She had to leave the country within two days after the agreement was registered because the transfer process was delayed in trying to figure out the Finance Minister’s new withholding tax applicable to property purchased from NRIs.


The recent Budget decreed that if a buyer fails to deduct withholding tax he/she is liable to be penalised whenever the IT authorities notice the lapse. This draconian rule transfers the tax department’s collection responsibility on to ordinary people but is difficult to implement. Three tax experts offered divergent opinions on the amount to be deducted and the payment procedure.


The deal was finally signed with two days left and the relieved buyer and seller went to the bank to collect the cheque. At every stage, the bank was kept informed about the developments and its officers repeatedly confirmed that the cheques would be ready. Yet, on reaching the bank, the customer was told that it would take at least 24 hours to complete various processes and there was no way the cheque would be issued earlier. The seller would have had to leave the country without the cheque.


The bank insists this is a one off case and the risk assessment team had some questions; it also promises to re-examine “finishing line” issues. Why they were these never voiced or raised earlier? Why were false promises made until the very hour that the cheques were to be issued? And why not turn down the loan instead of stringing a customer along? What is worse, the bank expected the seller to walk away empty handed after having signed away the right to her property. Clearly this is absurd, but sellers apparently put up with it, because the bank forces them to.


It is as absurd as the Finance Minister expecting the buyer to investigate if a seller, who presents him/herself as an Indian and has local bank account, is a Non Resident and holding them responsible for collecting withholding tax and under threat of future penalty. The rule would at least have been justified if realty brokers were registered and regulated in this country, had to comply with Know Your Customer (KYC) rules and were held responsible for making appropriate disclosures to the buyer/seller.


These experiences explain why the late H.T. Parekh was revered as the doyen of mortgage finance. In a closed economy, an unregulated realty market and without any competition in sight, he set up an organisation where the customer came first and every deal concluded with a smile on the face of the buyer and the seller.


-- Sucheta Dalal