Vijay Hashia
Recently, RBI Governor Sanjay Malhotra took a firm stance against banks flush with liquidity, yet failing abysmally in delivering adequate customer service. In a scathing attack, the Governor RBI highlighted the dismal state of customer grievance redressal, exposing a systemic rot that plagues the banking sector. Data substantiates this dire assessment, a plethora of complaints filed with the RBI Ombudsman remain unresolved, which is indicative of widespread negligence and apathy. The Governor aptly termed this a “highly unsatisfactory situation” necessitating urgent intervention.
One of the most alarming revelations pertains to the deliberate underreporting of complaints by banks. Over one crore complaints were recorded in the financial year 2023-24, yet many were misclassified under categories such as “requests,” “queries,” or “disputes” rather than legitimate grievances. Such obfuscation not only distorts regulatory oversight but also constitutes a blatant violation of transparency norms. The extent of this malpractice suggests a concerted effort to camouflage systemic inefficiencies and evade accountability.
The gravity of these issues extends across a broad spectrum of malpractices, ranging from forgery and erroneous entries to outright financial exploitation. Customers frequently report being fleeced through arbitrary interest rate hikes that disregard the RBI’s repo rate framework based on (EBLR) and the Marginal Cost of Funds-Based Lending Rate (MCLR). A particularly egregious case emerged from Gujarat, where an individual’s credit score plummeted due to his bank’s error, rendering him ineligible for future loans. Similarly, mis-selling of investment schemes and life insurance policies under the guise of financial advisory is rampant, with some banks incentivizing staff to prioritize sales over customer welfare. The laxity in due diligence concerning gold loans, unsecured loans, and top-up loans further exacerbates the problem.
The most insidious of this crisis is the nexus between banks and real estate developers. Thousands of homebuyers find themselves trapped in an endless cycle of paying Equated Monthly Installments (EMIs) for properties that exist only on paper. In certain cases, banks have disbursed up to 60% of a loan amount, yet not even a foundation stone has been laid, a scenario that reeks of collusion and quid- pro -quo arrangements.
The writer himself is a victim of such financial malpractice of one of the leading banks. In December 2024, he was abruptly informed that home loan interest rate had surged from 8.5 % to 10.60%, despite the concurrent reduction in the RBI’s repo rate (6.25%). Moreover, his request for a transition from Marginal Cost of Fund Lending Rate (MCLR) to the External Benchmark Lending Rate (EBLR) was summarily ignored on the flimsy pretext that the housing loan amount was less than 10 lakhs. In a blatant act of financial opacity, the lender unjustifiably inflated the loan availed amount from Rs. 5.15 lakh to Rs. 7.17 lakh. Had the borrower not meticulously maintained his records, he would have been wrongly overcharged. The situation spiraled further when, in January 2025, the bank sent eight contradictory emails within five days, each citing different inflated figures and irregular EMI calculations. This flip-flopping of numbers reflected not just inefficiency but a fundamental lack of professionalism and accountability. Even after escalating the matter to the Chairman, no resolution was forthcoming as the complaints were misclassified. It was only when the RBI Ombudsman acknowledged the complaint on March 6, 2025, and the issue was resolved.
Recognizing the growing concerns of borrowers, the RBI has issued a pivotal circular on August 18, 2023, titled “FAQs on the RBI Circular: Reset of Floating Interest Rate on EMIs.” Effective from January 2024, this directive seeks to empower borrowers by mandating banks to provide clear options for managing interest rate fluctuations. As per this circular, home loan borrowers must be given the flexibility to switch between fixed and floating interest rates at the time of reset.
The RBI further reinforced this mandate through an FAQ issued on January 10, 2025, stipulating that lenders must offer fixed interest rate options across all personal loan categories, including home and car loans, and allow smooth switching between external and internal benchmark-linked loans. Moreover, any charges levied for such transitions must be transparently disclosed to borrowers. This mechanism ensures that when the RBI hikes the repo rate, borrowers have the option to shift to a fixed-rate regime to mitigate rising interest costs. Contrarily, when the repo rate is reduced, borrowers can make transition back to floating rates on lower borrowing costs.
Furthermore, lenders are required to furnish periodic updates detailing any modifications to EMIs, loan tenures, and outstanding balances. Borrowers must also be apprised of their options to counteract rising interest rates, be it through adjusting EMIs, extending loan tenures, switching to fixed rates, or making prepayments, but the borrowers are left bereft of all these facilities.
The RBI must take stringent action against errant financial institutions, ensuring that customer interests are safeguarded. Merely issuing directives is insufficient; enforcement must be rigorous, with hefty penalties for non-compliance. Furthermore, banks should be held accountable for falsifying complaint data and misclassifying grievances.
The banking sector stands at a critical juncture, where trust and transparency are paramount. Customers deserve not only hurdle- less financial services but also an assurance that their grievances will be addressed with diligence and integrity. Governor Sanjay Malhotra’s intervention is a much-needed wake-up call. However, systemic reform requires more than just rhetoric; it necessitates decisive action and strict enforcement. Only then can the banking system restore its credibility and fulfill its fundamental duty of serving the public in good faith.
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