In order to help people understand the several loan charges, RBI has asked banks to print all these charges on the loan application form:
2. With a view to bringing in fairness and transparency, banks are advised that they must transparently disclose to the borrower all information about fees/charges payable for processing the loan application, the amount of fees refundable if loan amount is not sanctioned/disbursed, pre-payment options and charges, if any, penalty for delayed repayments if any, conversion charges for switching loan from fixed to floating rates or vice versa, existence of any interest reset clause and any other matter which affects the interest of the borrower. Such information should also be displayed in the website of the banks, if any, for all categories of loan products.
3. In other words, banks must disclose ’all in cost’ inclusive of all such charges involved in processing/sanction of loan application in a transparent manner to enable the customer to compare the rates/charges with other sources of finance. It should also be ensured that such charges / fees are non-discriminatory.
Just what Thaler and other behavioral economics followers would recommend. It is really confusing to understand all these details. Though bank staff explains the details, it is difficult to remember all the issues. One also does not know all the issues in case of taking a loan. This sort of move will help.
RBI has been slow to enforce this measure on banks. In Dec 2008, a similar notice was issued but has not been implemented.
In another move (not related to nudging), RBI plans to put a cap on several bank charges. Bank charges you for many services – pre-paying home loans, demand drafts, depositing cash at other branches of the bank etc. These charges are seen as high and varies across banks as well:
The central bank has referred the issue to a high-level customer committee, which was set up in June to look into the issue of customer services offered by banks. The committee, which is headed by former Securities & Exchange Board of India Chairman M Damodaran, will submit its recommendations in January.
The Damodaran committee has also been entrusted with a larger mandate of suggesting sweeping reforms. In an interaction with committee members, RBI Governor D Subbarao reportedly said the committee’s suggestions should encompass the needs of the next 10 years.
The move to cap charges is a significant shift in RBI’s stance of not involving itself in regulating fees and interest rates of individual banks. However, RBI now also feels that since banking is a highly regulated service industry with very stiff entry norms, customer service cannot be entirely left to market forces.
Rather, it is the regulator’s duty to protect small customers. “We will make it clear that such steps will be only for small savers and retail customers and not for corporate entities,” said a central bank official.
Hmm… interesting stuff.
Economists might have scorned on these interventions before the crisis. It is a significant shift of views from “leaving all decisions to market forces” to “markets may not be right and hence need for intervention” approach.
RBI has also taken forward the lessons from the crisis where banks were seen applying esoteric and hidden charges to public.