The power imbalance between banks and customers, especially in the retail banking sector, accentuates the need for stronger regulations and protections for consumers in India. Financial literacy, regulatory oversight, and better consumer protection mechanisms are essential to ensure that banks remain transparent and accountable in their dealings with customers.
Banking despite its essential role in the economy, often has a dark, hidden, and unfair side that impacts the common person, especially in developing economies like India. While banks claim to provide financial inclusion and equal access, the ugly reality is that banking transactions are designed to exploit the customers and lack transparency. Banks and financial institutions exert pressure and dictate terms that suit them.
Let’s look at some case studies and examples of this dark side in the Indian banking system.
Hidden Charges
Banks in India often entice customers with seemingly attractive loan offers, such as home loans, personal loans, and car loans. However, these loans come with several hidden charges that aren’t disclosed upfront. Customers often end up paying high fees and interest rates.
Also Read: The dark, hidden and ugly side of banks in India – Part 1
One common practice is the charging “processing fees” as high as 2-3% of the loan amount. Customers are also not informed about the high prepayment penalties, which can be as high as 4-5% if they decide to pay off the loan early. Customers only come of know of these penalties after signing the loan agreement.
Case Study – Misleading Personal Loan Practices:
ICICI Bank faced allegations of misleading customers about personal loan products in the 2010s. Customers were lured with low-interest loans, but the bank did not disclose the processing fees and other charges, which often made the loan far more expensive than anticipated. This lack of transparency led to several complaints from customers who felt cheated by the bank’s practices.
Aggressive and Unethical Debt Recovery Practices
Another dark side of banking in India is their aggressive recovery tactics from customers who could not pay the EMI due to some medical or family emergency. Banks can go to any extreme to threaten or harass small time defaulters, while big sharks like Nirav Modi, Mehul Choksi and others who owe millions of rupees to the bank, may continue to play golf or throw parties for the bank’s top brass.
Case Study – Recovery Agents’ Aggressive Behaviour:
State Bank of India’s recovery agents used threats, intimidation, and violence to collect overdue loans from customers. In one case, a recovery agent who went to a woman’s house, threatened to harm her family. This invited sharp criticism in the newspapers.
NPAs and their impact on customers
Non-Performing Assets (NPAs) are loans or advances to borrowers who fail to repay the principal or interest on the loan within a period of about 90 days. According to the Reserve Bank of India (RBI), the gross NPAs of scheduled commercial banks is around ₹5.8 lakh crore (approximately $70 billion USD) as of March 2023.
Also Read: The dark, hidden and ugly side of banks in India – Part 2
In general Public sector banks (PSBs) have a higher NPA ratios and amounts compared to private sector banks. Some such Public Sector Banks (PSBs) with higher NPAs include State Bank of India (SBI), Punjab National Bank (PNB), Bank of India (BOI) and Union Bank of India. In case of Private Sector Banks – Yes Bank and Lakshmi Vilas Bank now merged with DBS Bank India account for the biggest share of NPAs.
NPAs are a serious problem in the Indian banking sector. The crux of the problem is that banks treat big and small defaulters differently. While recovery agents may make life miserable for the small time borrowers and embarrass them by visiting their home or office, the big time borrowers are treated like privileged customers. Banks often write off the unpaid EMIs by the large corporations and business tycoons and approve more loans to them – even when they are not creditworthy and have intentionally defaulted on repayment of loans. As a result while large corporates, managed to get their loans restructured or written off, without severe penalties, the average customer is made to pay higher interest or agree to much stricter repayment terms.
Case Study – Vijay Mallya and Kingfisher Airlines Default:
Vijay Mallya, the former owner of Kingfisher Airlines was the master mind behind one of the largest corporate loan default in India. Mallya was accused of defaulting on loans worth over Rs 9,000 crore but still managed to flee the country, while the common man, was forced to agree to much tighter lending norms and pay a higher rate of interest.
Financial Exclusion and Unfair Banking Services
Banks claim to offer financial inclusion, but still a significant portion of India’s population remains excluded from the banking system. Rural areas and economically weaker sections in particular face the brunt of this exclusion. This leads to vicious cycle where the underprivileged remain trapped in poverty without access to credit or savings mechanisms.
Also Read: The dark, hidden and ugly side of banks in India – Part 3
While the government of India launched initiatives like the Pradhan Mantri Jan Dhan Yojana (PMJDY) to increase financial inclusion, the quality of services provided is poor. Many accounts are opened without ensuring that account holders have access to basic banking services, such as ATMs, mobile banking, or financial literacy.
Case Study – PMJDY and Unused Accounts:
Many of the PMJDY accounts are lying remain dormant. Indian banks opened 540.3mn (million) or 54.03 crore Pradhan Mantri Jan Dhan Yojana (PMJDY) accounts since the scheme was launched over ten years ago. Nearly 21% or 113 mn of these accounts are inoperative or dormant (no customer-induced transaction for two years), the government told the Lok Sabha.
According to the minister of state for finance Pankaj Chaudhary, “As reported by banks, as of 20 November 2024, a total of 54.03 crore accounts have been opened under PMJDY. Out of these, 11.30 crore accounts are inoperative accounts.”
“As per Reserve Bank of India (RBI) guidelines, a savings as well as a current account should be treated as inoperative or dormant, if there are no customer-induced transactions in the account for over a period of two years. Banks continuously make concerted efforts to monitor the percentage of operative accounts and the progress is being regularly monitored by the government. Also, banks organise camps to create awareness about banking habits, including the benefits of keeping the account active,” he said in a written statement.
Chaudhary added that RBI has advised banks to undertake an annual review of accounts and deposits where there have been no customer-induced transactions for more than a year and to take steps to trace the customers of these accounts and deposits.
According to the minister, banks have been advised to take necessary steps urgently to bring down the number of inoperative accounts and make the process of activation of such accounts smoother and hassle-free, including by enabling seamless updation of know-your-customer (KYC) through mobile or internet banking, non-home branches and video customer identification process (V-CIP).
As per data shared by the Finance Ministry Uttar Pradesh tops in every aspect of the PMJDY, including the number of accounts, the number of inoperative or dormant accounts and the balance in these dormant accounts. Uttar Pradesh has a total of 96.4mn (or 9.63 crore) accounts opened under the PMJDY scheme, out of which 23.4mn or 2.34 crore are inoperative with a balance of Rs. 2,763.69 crore in them.
Bihar comes second with 61.4mn PMJDY accounts. There are 11.9mn or 1.19 crore dormant accounts with a balance of Rs 2,007.66 crore.
Madhya Pradesh ranks third in terms of dormant accounts and the balance in such accounts. While West Bengal has 52.59mn PMJDY accounts, including 7.85mn inoperative accounts with a Rs 827.73 crore balance. Madhya Pradesh has 9.21mn dormant accounts with a balance of Rs1,079.75 crore.
All this is largely because millions of people in rural areas either do not have access to bank branches or cannot afford the minimum balance requirements that banks impose on their accounts. This results in a situation where the promise of financial inclusion is not fulfilled, leaving millions of people without proper access to banking facilities.
Dark Side of Digital Banking Technology
The phenomenal rise of digital banking in the last few years has indeed increased the risk of fraud, exploitation, and regulatory challenges. Online loan platforms and digital banking apps often target customers with bad credit ratings or low financial literacy. These platforms tend to charge excessive interest rates and apply high penalties for missed payments.
This has led to the proliferation of several predatory online/ digital loan platforms and digital banking apps which target vulnerable customers with bad credit ratings, or low financial literacy offering instant loans to customers, often with little to no regard for their ability to repay. These apps charge exorbitant interest rates and impose severe penalties for missed payments. These apps have their own risks and benefits.
Benefits:
1. Easy access to loans and financial services.
2. Quick application and approval processes.
3. Services available to a wider audience, including those in remote areas.
Risks:
1. Some platforms charge excessive interest rates.
2. Unexpected charges or penalties.
3. Risk of data breaches or misuse.
4. Target vulnerable borrowers with unfavourable terms.
Case Study – Rise of predatory digital lending apps:
The Indian government began cracking down on several digital lending platforms which had unreasonably high interest rates (sometimes over 50%) and used intimidating recovery practices. Customers often found themselves in debt traps, unable to repay the loans due to the increasing interest and fees.
Conclusion: The power imbalance and exploitation
The banking system in India, despite its vital role in the economy, exhibits significant power imbalances that can negatively impact customers. From non-transparent loan products and aggressive recovery practices to the corporate loan defaults and financial exclusion, banks often prioritize profits over customer welfare. For the average person, navigating the banking system can be an exhausting and, at times, unfair experience.
While reforms are underway to address some of these issues, the exploitation and systemic issues remain. In the long run, addressing these challenges requires a robust regulatory framework, greater transparency, and a customer-centric approach from financial institutions to create a more just and equitable banking system.
Well researched as always. But, I am a bit surprised about Case Study on Kingfisher. The whole Globe knows that more than a dozen Airlines in India have gone belly down due to poor policies for the Sector and excessive duty on ATF. To single out KF as a Case to me looks unfair, just because he flew out. You know our Judiciary takes decades on such cases, though would instruct President and Governors to decide in 30 days. Also, in this case the Banks have recovered dues with interest as informed in Parliament as also from Public domain data. Of course, the rest of the points covered are certainly worth studying by the Policy makers and industry for necessary corrections.