Will RBI’s rap on knuckles force banks to be fair to their customers? – Moneycontrol

There have been countless disputes against banks on delayed release of collateral documents even after paying up full loan. That will change now.

Banks often delay release of documents of property even after the customer pays up the entire loan. Often, the wait thereafter and the repeated visits to the bank become a painful exercise for the borrower. The regulator has finally taken note of this and has just given a rap on the knuckles of banks to get their act right.

The message from the regulator to banks is simple — be responsible in your lending practices.

On 13 September (Wednesday), the central bank said it has noticed divergence in the in release of such movable / immovable property documents leading to customer grievances and disputes. Subsequently, the central bank has come up with a set of new rules. For borrowers , particularly those who have paid up loans against immoveable properties (house, plot etc) or movable (auto loans for example), these norms are extremely important.

What does it say? Banks have now been asked to release all documents within 30 days of full payment to the borrower. If this doesn’t happen for reasons that are attributable to the lender, the bank has to pay Rs 5,000 as compensation each day of delay to the borrower. What this effectively means is that banks will have to now pay a penalty for laxity in doing their job.

Further, the borrower needs to be given an option of collecting the original documents either from the banking branch where the loan account was serviced or any other office of the bank where the documents are available, as per the customer’s preference, the RBI said. Also, banks must mention the timeline and place of return of original documents in the loan sanction letter, the RBI has specified.

That’s not all. If the borrower is not alive, banks needs to have a well laid out procedure for return of original movable or immovable property documents to the legal heirs. These norms will come into effect from December 1, 2023.

These steps are welome and have come at the right time.  The RBI has been reminding banks to ensure fair practices in lending. As this writer highlighted in an earlier column, customer fairness is a principle, often preached but hardly practiced by banks. Banks have always found loopholes when it comes to praticing customer fairness standards and this issue needed to be addressed sooner than later. The RBI has been acting in this direction.

Earlier warning

Early this year, the RBI offered another strong warning to the lenders on this issue. The regulator then found that the banks often use the penal charges to generate revenues, instead of trying to instill discipline in customers. The RBI laid out a clear framework tweaking the earlier rules. The fresh set of norms essentially say that the banks cannot use loan penal charges to make revenues and need to be transparent and accountable in their actions.

The penal charges should be separate from the interest charged on the loans and cannot be compounded, the RBI said. Banks have been adding various penalties to the rate of interest charged on the advances, thus leading to a big burden to the consumer. Such changes are also not communicated to the customers often with transparency. But, the larger issue of customer fairness is not only about penal charges, but also about gross mis-selling of products through bank branches.

The latest rule on release of property documents too needs to be seen as part of the RBI’s efforts to remind banks about the need for responsible lending and customer fairness. Will banks finally get the message from the regulator? It’s high time banks should realise that consumers cannot be taken for granted.


Dinesh Unnikrishnan is Editor-Banking & Finance at Moneycontrol. Dinesh heads the Banking and Finance Bureau at Moneycontrol. He also writes a weekly column, Banking Central, every Monday.

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