Make contracts simple to help customers, RBI official tells banks

BL :Mumbai, Oct. 4:2013

Simpler contracts will put an end to the many hidden penalties and fees in complex loans, according to Deepali Pant Joshi, Executive Director, Reserve Bank of India.

This will make everyone aware of what (loan contract) they are signing.

Banks need to apply principles of transparency to enable easier decision-making by clients, and verify assumptions about what clients understand and don’t understand about their products and the fine print in the contracts they sign.

“If you’ve ever applied for a credit card, a student loan, or a housing loan, you know the feeling of signing your name to pages of barely understandable fine print.

“What often happens as a result is that many people are caught by hidden fees and penalties, or saddled with loans they can’t afford,” said Joshi in her keynote address at the College of Agricultural Banking, Pune.

They are also hit with a massive rate increase on their credit card balances even though they have paid bills on time.

“Students who take student loans should have clear and concise information about their obligations.

“Ordinary investors — like you and me, seniors saving for retirement — should be able to receive and understand information about the costs and risks of mutual funds and other investment products so that they can make better financial decisions as to what will work for them,” said Joshi.

Information imbalance

Banks need to address the needs of the customer and customise products and services without adopting a one-size-fits-all approach, she added.

The RBI official observed that the greatest threat arises from the asymmetries information and power between financial institutions and poor consumers.

This imbalance widens as customers are often less experienced and the products they choose are more sophisticated.

This means, there is a real potential for negative outcomes arising out of institutional abuses or ill-informed client decisions.

Financial education is an important tool to address this imbalance and help consumers, she said. .