The Reserve Bank of India is exploring the possibility of enshrining financial inclusion in the Code of Bank’s Commitments to Customers, according to K.C. Chakrabarty, Deputy Governor.

The Code, which is voluntary, sets minimum standards of banking practices for banks to follow when they are dealing with individual customers. It provides protection to customers and explains how banks are expected to deal with them.

Financial Inclusion is the process of ensuring access to appropriate financial products and services – deposit accounts, payment services, micro-credit and micro-level insurance – to vulnerable groups such as weaker sections and low income groups by mainstream institutional players.

“In India, we have been proactively pursuing the holy trinity – financial inclusion, financial education and consumer protection.

“We are even exploring the possibility of enshrining financial inclusion in the Code of Banking Practices (referred to as the Code of Commitments in India),” said Chakrabarty in a speech at a recent seminar in Pune.

The extent of financial exclusion in the country is staggering. Out of the 6 lakh habitations in the country, only about 36,000 have a commercial bank branch. Just about 40 per cent of the population across the country has bank accounts.

The proportion of people having any kind of life insurance cover is as low as 10 per cent and the proportion having non-life insurance is abysmally low at 0.6 per cent. People having debit cards comprise only 13 per cent, and those having credit cards only a marginal 2 per cent of the population.

“With nearly 4.5 billion people on this planet owning a mobile phone, there is a very strong likelihood of financial inclusion being pushed through the mobile phone and mobile payment medium.

“This is more so in the developing countries where mobile phone penetration is 8-10 times the penetration of the basic bank account,” said the Deputy Governor.

Chakrabarty observed that rather than treating mobile payments as a threat, banks need to see it as an opportunity to access low-income segments of the market.

Retail distribution of financial products

The Deputy Governor said retail distribution, as is now being carried out, may not necessarily be in the best interest of the consumers.

There are certain issues, particularly from the perspective of incentive structures for sale of financial products, monitoring of anti-money laundering requirements, risks of mis-selling, and inadequate understanding of risks by the sales persons, etc.

Hence, it is important that financial service providers and regulators have a closer look at the practices followed in retail distribution of financial products.

As regards regulating the activities of financial advisers, Chakrabarty said it is very important that people with limited means get proper advice at the right time and at least cost.

“The regulators, perhaps, have to take this responsibility (regulating the activities of the financial advisers) upon themselves with a view to empowering the consumers and helping them protect their life savings,” said Chakrabarty.

Redress mechanism

The Deputy Governor said “If an institution is in the wrong, why should it wait for the consumer to approach it for compensation?

“Would it not be righteous if the bank or financial institution on its own initiates action to undo the wrong inflicted on customers, some of whom may have not even complained?”

Chakrabarty felt that such an approach would enhance the faith and confidence of the consumers in the financial system.

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