Banks' discrimination of retail borrowers will reduce penal charges under many pretexts which boost banks' profits if the Reserve Bank of India implements the recommendations of a committee on customer service in banks.
Retail depositors need not stuff their money under the mattress during crisis, such as the one in 2008, as deposit insurance, last raised in 1993, may be increased five times the limit to Rs 5 lakh.
The proposals, among others, state that mortgages with similar risk profile should be charged uniformly and those presenting cheques should not be penalised for bounce, but compensated in the event of wrong returns. The onus of proving transactions on lost debit or credit cards that was done by the holder now shifts to banks from customers.
"In a floating interest rate scenario, when an entire class of borrowers has the same characteristic and risk level, the point of entry in time (old customers and new customers) should not create discrimination in interest rate offered to the customers," said the committee headed by former Sebi chairman M Damodaran.
The panel, which received more than 1,000 suggestions, said banks should not impose exorbitant penal rates towards foreclosure of home loans to facilitate switching over to other banks or financial entities.
"Banks should not impose exorbitant penal rates towards foreclosure of home loans and a policy should be devised to ensure that the customer is not denied of opportunity to enhance his economic welfare by making choices such as switching to other banks/financial entities to enjoy the benefits conferred by market competition," said the committee, which is the fifth such panel since 1975.
Banks now charge around 2-2.5% on the pre-payment of a home loan, which for some customers becomes impossible to shift even if s/he is offered attractive rates by rivals.
"There is a large section of home loan borrowers who feel that even with the same kind of scoring, new customers are getting better terms," said Union Bank of India executive director SC Kalia. "Banks have their own arguments for incentives but yes, existing borrowers have every reason to feel this. Floating rate means the rate should be uniform for the same category of borrowers."
The report suggested banks should design products suiting the requirements of customers rather than forcing upon the bundled products.
"The recommendations are great boon for customers but they will require added efficiency for banks," said Parthasarathi Mukherji of Axis Bank. Also, banks are recommended to inform customers on the balance in the account breaching minimum balance and the applicable charges for not maintaining the balance.
"DICGC is supported by the government in case the bank fails, so it is the government that has to increase its funds. Banks will just have to pay a nominal insurance premium," said V Ramagopal, executive director of Indian Bank.
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