Being ‘Sachet’ in Curbing Illegal Money Deposits

By Monami Dasgupta, IFMR Finance Foundation

Taking a significant step towards curbing illegal collection of deposits by unauthorized and illegal entities, RBI recently set up a website named ‘Sachet‘ (Alert). This initiative is in line with a recommendation made by the Committee for Comprehensive Financial Services for Small Businesses and Low Income Households (CCFS, 2014)[1] on Citizen led-surveillance, namely that “RBI should create a system by which any customer can effortlessly check whether a financial firm is registered with or regulated by RBI.”

The website is a one-stop point for citizens to lodge and track a complaint against illegal acceptance of deposits/money by any scrupulous individual or entity. The website will enable citizens to lodge a complaint with a plethora of regulators. The information provided here is expected to be immediately shared with the concerned Regulator/Law Enforcement Authority who would initiate necessary action as per their procedures and processes. Citizens can also check whether an entity is registered with any regulator and whether they are permitted to accept deposits. The website also serves as an easy point of access to inform citizens about the regulations prescribed by all financial regulators and across central and state legislations. Having said this, it would have been greatly beneficial for the public to understand legislation if there were links that would direct to helpful content such as that on the NCFE website that provides impartial and easy to understand financial educational content (a similar example in another jurisdiction is that provided by ASIC’s MoneySmart website for Australia).

The Sachet website is also a platform for State Level Coordination committee[2] (SLCC) to disseminate information among members of SLCC, which in turn will help in curbing illegal and unauthorized money raising activities.

A snapshot of the regulators listed on the website (provided below) interestingly excludes certain categories of institutions in whose name fraudulent activities can be performed, such as banks, cooperative banks, and regional rural banks, as well as those types of entities that do not fall under the purview of any of the financial sector regulators, such as cooperative societies, trusts, NGOs and so on.


The Complaint Filing process is illustrated below:


If the SLCC does not forward the complaint to the respective authority within 30 days, the complainant can send a reminder to them.

It is important to note that this website is not intended as a solution to the last mile problem of difficulties in accessing external customer grievance redressal mechanisms. There is no link to the external grievance redressal mechanisms such as the Banking Ombudsman (for banks), Insurance Ombudsman (for insurance companies), SCORES for SEBI-regulated entities, or PFRDA (for pension products). Once a complaint enters the Sachet system, a seamless link to these websites would bring down customer distress considerably.

This is a significant first step in the right direction towards protecting customers from illegal and unauthorized individuals or entities that collect deposits, whether or not they are able and willing to repay these deposits. For a holistic last-mile solution, practitioners like various financial institutions as well as post-offices and district-level government offices can also get involved in the process of disseminating information about Sachet.

1 – CCFS Report – https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/CFS070114RFL.pdf, Pg 187.
2 – State Level Coordination Committee (SLCC) is the joint forum formed in all States to facilitate information sharing among the Regulators viz. RBI,SEBI,IRDA,NHB, PFRDA, Registrar of Companies (RoCs) etc. and Enforcement Agencies of the States viz Home Department, Finance Department, Law Department, Economic Offences Wing (EOW)


Assessing Suitability – What’s the future for financial providers’ legal duty of care?

By Malavika Raghavan, IFMR Finance Foundation

In the previous blogpost we noted the gradual shift away from the buyer-beware standard in case law and policy regarding customers of financial products. So far this move towards more provider liability has occurred in a piecemeal fashion – through decisions of the courts and regulations of certain regulators. For the first time in Indian law, the draft Indian Financial Code (IFC) is proposing a statutory obligation of this kind when it comes to retail financial services. Providers offering products and services in the course of day-to-day retail financial services business (such as discussing a loan with a borrower) will have to begin undertaking an “assessment of suitability”.1

Separately, the RBI’s Charter of Customer Rights has enunciated five customer rights including the “right to suitability” i.e. the right for customers to be offered products appropriate to their needs. The RBI has advised banks to formulate a board-approved policy incorporating these rights into their business process, along with monitoring and oversight mechanisms for ensuring adherence.2

As the movement towards more provider-liability grows, we pause to ask:

Could requiring higher standards of conduct from retail financial advisors fundamentally shift the legal duty of care we expect from them? Will these change the standards of civil liability in tort law that retail financial services providers are subject to?

Wider civil law liability under tort law operates over and above contractually-agreed terms and conditions between financial services providers and customers. This question is important because it could subject financial services providers to a higher legal standard of care irrespective of the contractual terms of their products.

Could we foresee a future where Indian tort law begins to recognize a higher standard of care for financial services providers?

Currently, customers of products can raise claims against faulty products or poor service through a range of legal avenues. These avenues can arise from:

  • Written legislation or statutes which give customers rights (like the Sale of Goods Act, or the Consumer Protection Act),
  • The specific contract between the provider and the customer (in the case of financial products, the product’s terms and conditions),
  • Civil liability under tort law where a “tort” or civil wrong arises from a breach of duty (independent of any contractual breach) for which an action for compensation can be pursued,
  • Through criminal law (for e.g. financial crimes like fraud or criminal breach of trust),
  • And finally, by approaching courts when customers feel that fundamental rights guaranteed by the Indian Constitution have been infringed (especially in cases involving public financial institutions).


Tort law – a branch of civil liability that has evolved from judge-made common law – has continued its development in Indian courts. Of specific relevance to our current discussions, is the tort of negligence which deals with loss or harm caused by the careless or unreasonable conduct by a person to another. For an act or omission to constitute the tort of negligence, there must have been (i) a legal duty of care that one party owed to another party (ii) a breach of this duty (iii) which results in the other party to suffer loss or damage as a result.3

To understand the duty of care that is owed by the allegedly negligent party in any situation, the standard applied is of the “reasonable person” i.e. whether a reasonable person in the same situation would have acted differently. This objective standard is raised for people performing actions which require special skills, such as doctors, lawyers, financial advisors or accountants. These types of service providers have their actions or omissions compared to a reasonable skilled person within their discipline, rather than the average person on the street.

It is foreseeable that the regulations implementing suitability requirements under the draft IFC will require specific training for providers’ staff to help them assess suitability of products. This is the case in the UK, for example, where the regulator expects firms to have internal systems to manage suitability requirements, including training customer-facing staff to understand the boundaries between advisory and other services, and undertake suitability assessments.4 The draft IFC appears to be moving towards engendering a process-oriented approach for assessing suitability by providers. The Indian Banks’ Association’s Model Customer Rights Policy, formulated at the RBI’s behest, also makes several references to appropriate training of staff. As we know anecdotally, retail advisors already hold weight when recommending products and services to customers. Requirements for advisors to undertake training could add to the manner in which they are perceived to be people of higher knowledge and skill, and raise the duty of care when they interact with customers. This is especially given that in the IFC, “advice” is defined widely to cover any communication directed at the consumer which could influence the consumer’s transactional decision making.5 Any higher duty of care for staff of providers would obviously not apply to non-advisory tasks which don’t require an exercise of discretion (like basic bank teller functions).

It’s important to note that moving towards a higher standard of care for the staff of providers would not make them the scape-goat for all financial losses customers suffer. If market forces affect the returns from products, providers can’t be held responsible for this. As a parallel, we do not hold doctors liable if the patients’ body rejects a kidney. However, the law does expect the doctor to have used the same diligence in the treatment and operation as another doctor of the same skill would have.

Likewise, if customers provide false information then providers can’t be held liable for improper advice. Under tort law, the doctrine of unclean hands would give providers a defence against customers who act in bad faith. Additionally, contributory negligence is a principle in tort law that would protect providers where customers through their own actions contributed to the harm they suffered. The draft IFC also absolves providers of responsibility in the case of information about customers’ personal circumstances which was not obtainable despite “exercise of professional diligence”.6

In conclusion, the question of whether retail financial services providers providing advice and recommendations to retail customers should implicitly owe a higher standard of care to customers is one that beckons tantalizingly in Indian tort law. It will be interesting to see if the general trend towards provider-liability for financial services will reimagine deeper civil liability standards for providers in India. Such a development could be one more piece in the armour of customer protection law in India.

This is the concluding post of the series which you can access in full here.

  1. Section 120(1) of the draft Indian Financial Code, draft released 23 July 2015, Available at < http://finmin.nic.in/suggestion_comments/Comments%20on%20Draft%20IFC.asp> (Accessed 15 January 2016) (Hereafter the “draft IFC”).
  2. http://www.ifmr.co.in/blog/2014/12/04/suitability-becomes-a-customer-right/
  3. For an accessible text (available free at the time of writing online) see Part III (The Tort of Negligence) of Jenny Steele, Tort Law: Text, Cases and Materials (3rd edition 2014, Oxford University Press) Available here. (Accessed 15 January 2016).
  4. Practical Law, FCA Suitability requirements: COBS 9, Available here. (Accessed 15 January 2016).
  5. Section 2(6) of the draft IFC.
  6. Section 120(2) of the draft IFC.


Customer Protection through MFI Self-Regulation in India


By Rachit Khaitan, IFMR Finance Foundation

Comments on the Revised Code of Conduct for the Microfinance Industry

M-FIN and Sa-Dhan, two key Self-Regulatory Organisations (SROs) of the microfinance industry jointly released their revised Code of Conduct for the Microfinance Industry in December 2015. The revised Code of Conduct following from the original 2011 version, is vital for setting standards of behaviour and maintaining norms through collective action[1], with a view to uphold client protection in the industry in line with and in some aspects beyond regulatory statutes.

In this post, a few salient and commendable features of the revised Code of Conduct are highlighted, alongside potential concerns and recommendations.


This section features an important commitment to “disclose all terms and conditions to the client, in a form and manner that is understandable, for all services offered.” It further indicates a commitment to securing clients’ informed consent and communicating details in a language understood by the client. These details include simple concepts such as all associated fees and charges but also more complex aspects such as interest and fees payable as an all-inclusive Annual Percentage Rate (APR) and equivalent monthly rate. This is in line with the RBI Guidelines for Fair Practices Code for NBFCs[2].

However, given the sometimes complex aspects of information that are imparted to clients, there is necessity for MFIs to better ensure truly informed consent based on demonstrated customer understanding. This could be implemented, for instance, in the form of a short verbal quiz about product features and obligations to be administered to the client at the point of sale based on some rules of thumb.

Avoiding over-indebtedness:

The sub-section on over-indebtedness is an important part of the Client Protection section.

It includes a commitment to “conduct proper due diligence as per [the MFI’s] internal credit policy to assess the need and repayment capacity of clients before making a loan and must only make loans commensurate with the client’s ability to repay”. This addresses a key aspect of preventing bad outcomes by verifying that loan clients are able to afford paying back the principal and the interest by the end of the loan tenure. Given the critical nature of this commitment, there is also a necessity to put in place a commitment for a Board-approved policy to ascertain client ability to repay and prevent financial distress. This would be in line with the RBI Charter of Customer Rights[3] and the IBA Model Customer Rights Policy[4] which includes a commitment to prepare Board-approved policy incorporating the Right to Suitability, stated as “products offered should be appropriate to the needs of the customer and based on an assessment of the customer’s financial circumstances and understanding.”

There is a concern that this does not however include a commitment to ascertain whether clients are able to make repayments without substantial financial stress throughout the tenure of the loan. For instance, liquidity mismatches between structured instalment frequencies (typically weekly or monthly) and household cashflows could lead households to take on additional loans from informal sources or sell off assets such as livestock or land at below market prices, even though such households are comfortably able to repay the loan by the end of the tenure. This concern is exacerbated by the absence of adequate savings mechanisms for MFI clients, who are oftentimes unable to safely put away relatively large sums of money for future use. There is thus a necessity to enhance the nature of MFI due diligence for better client outcomes. There is also a necessity for a commitment to design and distribute products that are appropriate and flexible to address the needs and financial situations of customers, while preventing financial distress. This is in line with the RBI Master Circular on Customer Service in Banks which indicates the role of a Customer Service Committee of the Board to address the product approval process “with a view to suitability and appropriateness.”[5]

The sub-section also includes a commitment for an MFI not to exceed the borrowing limit of Rs. 60,000 for a JLG customer (which is lower than the RBI mandated total indebtedness cap of Rs. 100,000)[6] in a group arrangement or to be the third lender to a client. There is a concern that such caps on lending might be restrictive to households that might have a genuine need and ability to repay higher loan amounts. Moreover, there does not seem to be clear basis for both cap values, especially when MFIs are already committing to conduct proper due diligence on client need and repayment capacity of every client.

There is an additional concern that customer data from credit bureaus may not provide a complete assessment of overall household indebtedness. Credit institutions are yet to fully act upon RBI’s requirement[7] to report to all credit bureaus, especially in terms of loans from the bank and SHG channels, although there has been steady progress[8]. Credit bureau data is also, at best, unable to include household debt outstanding from informal sources such as local moneylenders. There is thus a need for a commitment to better understand customer indebtedness and financial situation through customer self-reported information, which when triangulated with credit bureau information can provide a more complete assessment of household indebtedness.

The sub-section includes important commitments with regard to authenticating client identity and sharing client information. The move towards Aadhaar-based KYC within two years will commendably enable more accurate credit bureau assessments of outstanding debt. The challenges of implementing a seamless KYC interface will need to be overcome with robust yet low-cost technology solutions that enable error-proof and real-time authentication.


The new Code of Conduct lays out commitments to have in place several Board-approved policies for debt restructuring, dealing with delinquent clients, fair collection practices, and processes to raise client awareness. Board-approval is valuable for putting in place policy for important client protection aspects that is pervasive across all levels of an MFI. This is therefore a very progressive development.

There is also a commendable commitment to prepare a monthly report on grievances received, resolved, and pending for senior management review and periodic reports to the Board. However, by the same rationale as the commitment on audit and compliance, there needs to be an additional commitment for appointing an independent grievance redressal committee that is directly accountable to the Board. This is in order to prevent a potential conflict of interest that operations staff could face leading to under-reporting of customer grievances.

Customer rights:

The new Code of Conduct also includes an important section that outlines the rights of a customer, in addition to commitments from participating MFIs, in similar vein as the RBI Charter of Customer Rights[9]. There are customer rights outlined to ascertain terms and conditions and current status of the loan and avail necessary documents and receipts, which are in line with the RBI’s Right to Transparency, Fair and Honest Dealing. There are also customer rights outlined to access a grievance redressal mechanism with the help of designated staff, receive acknowledgment and a response to grievance within a prescribed time limit, and appeal to a higher internal level or an external redressal mechanism (the nodal office of the RBI) if desired, which are in line with the RBI’s Right to Grievance Redress and Compensation. Other rights outlined in the RBI Charter, including the Right to Fair Treatment and Right to Privacy are included as commitments to customers, although given their relevance, need to be included as rights as well. Finally, there is a need for a stronger commitment and customer right to Suitability.

[1] SEEP Network – Codes of Conduct and the Role of Microfinance Associations in Client Protection (2012): http://www.seepnetwork.org/codes-of-conduct-and-the-role-of-microfinance-associations-in-client-protection-resources-345.php

[2] RBI Master Circular – Fair Practices Code (July 2015): https://rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=9823

[3] RBI Charter of Customer Rights (December 2014): https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=32667

[4] IBA Model Customer Rights Policy (January 2015): http://www.iba.org.in/Model%20Policy/Model_Customer_Rights_Policy_Amended_Final_27_1_15.pdf

[5] RBI Master Circular on Customer Service in Banks (July 2015): https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=9862

[6] RBI Master Circular on PSL Targets and Classification (April 2015): https://rbi.org.in/Scripts/NotificationUser.aspx?Id=9688&Mode=0#ANN

[7] RBI Directive on Membership of Credit Information Companies (CICs):

[8] Article on Livemint (August 29th, 2015): http://www.livemint.com/Industry/FRgAFR9Clo3nvMCdGFl37L/MFI-credit-bureaus-comb-client-data-to-smooth-microloans.html

[9] RBI Charter of Customer Rights (December 2014):


“Suitability” and the Law: Moving from scatter gun to straight shooter?

By Malavika Raghavan, IFMR Finance Foundation

The previous blog post in this series had presented some insights from our review of case law relating to financial products and services. This blog post will consider one of the questions raised at the end of the previous blog post: are the courtsand indeed the Law more generallyalready discussing what constitutes suitable advice and conduct on the part of financial institutions?

Suppose you invest in a market-linked insurance product without understanding how it works, whose fault is it if you lose your investment when the product matures?

If your insurance policy lapses during its term, but you don’t realise – should your insurer tell you?

If your bank miscalculates loan EMI payments or fails to debit loan repayments from your account, when should your bank inform you about this?

These are some of the questions that legal disputes are bringing to the courts, the answer to which often hinges on what constitutes “appropriate” or “suitable” conduct by financial service providers (FSPs).

Moving past caveat emptor

The logic of caveat emptor or “buyer beware” – that the buyer alone is responsible for checking the quality and suitability of goods before a purchase is made[1]— has traditionally been applied to the sale of financial products, just as it does to most retail goods and services. A classic example is seen in Surinder Kumar Singal vs. Aviva Life Insurance Co. India Pvt. Ltd.[2], where a complainant alleged that he was incorrectly informed of the terms of a life insurance policy. The state consumer forum held that although certain terms of an insurance policy were not mentioned in the insurance proposal form, since the complainant had received all the policy documents and a “Right to Consider” notice (allowing a cancellation of the policy within 15 days of receipt of Policy documents) the terms of the insurance were binding.

However, the “caveat emptor” approach is no longer typical or standard for disputes relating to financial products. Courts are beginning to interpret the law with more nuance, taking into account the type of customer and financial product involved in a dispute. This is the case especially where more vulnerable customers are involved. In one case filed at the Punjab State Consumer Forum, a market-linked pension policy had been sold to two illiterate customers without a clear explanation of how the product worked.[3] The illiterate policy holders were not aware of the product being market-linked, and there was no record of policy documents being despatched to them (indeed, the value of such documents to illiterate customers is debatable). The agents and the bank were held jointly and severally liable for the loss and that there had been a deficiency in service and unfair trade practice under the Consumer Protection Act.

Similarly, the High Court of Allahabad took a wider view of requisite FSP conduct when selling financial products in a case which questioned the validity of Unit Linked Insurance Plans (ULIPs) issued by a public sector bank.[4] In the case, the complainant invested Rs. 50,000 in a ULIP but on the maturity of the product was repaid only Rs. 248. He argued that the proposal form was couched in terms that did not disclose the dangers and consequences of picking the higher risk profile, and that the high “mortality charges” payable by senior citizens was not explained to him. The petitioner also argued that the ULIP was in breach of IRDA requirements on providing material information to the prospect on the insurance cover that would be in his best interest. Unilateral amendments to policy terms had also been carried out following discussions with IRDA about the policy. The insurer argued that the petitioner had been given all the policy documents and therefore could not allege a lack of knowledge of the risk profile and the minimum basic sum assured.

The Court held that Insurer (as public sector entity, considered to be the state for the purposes of the case) had a duty to act fairly and equitably, and that (i) the failure by the insurer to explain the additional mortality charges to the petitioner was in violation of IRDA guidelines (ii) the unilateral change of a term of the policy (which promised that if the value of the investment fell below Rs 10,000 the ULIP would be terminated) was wrongful and could not be done without the policyholder’s written consent (iii) this particular ULIP was an “an unconscionable contract and was thus arbitrary, illegal and void document” and it did not bind the Petitioner. The order has currently been stayed by the Supreme Court but is indicative of the courts actively reviewing the quality of advice given by financial institutions to their clients in the context of standard retail financial products.

Spelling out appropriate behaviour

In other cases, courts have spelt out what they consider to be appropriate conduct in relation to particular products. For e.g. where the insurer alleged that an insurance policy had lapsed due to a disruption in payment but went on to accept premiums, the Court held that the insurer should not have accepted further premiums and should have intimated the policyholder of the alleged lapse immediately upon its occurrence.[5]

In Karishma Raj Vs. State Bank of India[6], an educational loan of Rs. 4 lakhs had been granted by SBI to the appellant for studies in the UK. Only Rs. 2.08 lakhs were availed. Following this, despite sufficient funds and a standing order in the appellant’s account to repay the EMI, the bank stopped debiting monthly amounts from the account for nearly 2 years. It then declared the appellants as defaulters. The EMI for the loan was also wrongly calculated on the entire loan amount when only Rs. 2.08 lakhs had been drawn down. The Court held that the bank had not re-scheduled EMIs correctly; had failed to reply to the appellant-borrower’s letters in contravention of RBI Guidelines for Nationalised Banks (that responses are to be provided within 8 weeks); and that the litigation proceedings had an adverse effect on the appellant’s job and family’s health through the distress caused. Damages and costs were awarded to the appellant. 

The court has also apportioned liabilities from a lapsed insurance policy between the insurer and insured, where both contributed to the consequent loss. In Unit Trust of India and Ors. Vs. The Consumer Rights Society (Regd.) and Ors.[7], one premium payment during the course of a 15-year ULIP was not made due to the policy holder’s cheque being dishonoured. The policy terms clearly stated that failure to pay would result in withdrawal of the insurance cover, but the premiums continued to be paid and accepted for the years following the lapse. Here, the NCDRC held that there were lapses by the Insurer (for not returning the dishonoured cheque to the complainant as it should have) as well as the Insured party (for not following up a notice for a later premium which noted the previous year’s premium in arrest, or the lack of debits from his account). It was held that there could not be a revival of a lapsed insurance policy, but the failure of the Insurer in not actively informing the policy holder or returning the bounced cheque to him would require the payment of some compensation to the complainant.

Moving from a patch-work to a consistency ex-ante standard

As demonstrated in the cases noted above, courts are already making case-by-case determinations of appropriate conduct by FSPs in particular situations. In the longer term however, continuing with this patchwork approach can raise concerns about inconsistency and uncertainty for customers and FSPs.

A proper ex-ante understanding of the expected conduct of FSPs could reduce any potential inconsistencies. Indeed, several regulations and draft laws are seeking to do this.

  • The RBI’s Charter of Rights requires appropriate products to be provided to customers based on an assessment of their financial circumstances and understanding.[8] For derivative products, the RBI through its Comprehensive Guidelines on Derivatives has mandated that such products should only be offered to those “who understand the nature of the risks inherent in these transactions and further that the products being offered are consistent with users’ business, financial operations, skill & sophistication, internal policies as well as risk appetite”[9].
  • The SEBI has meanwhile introduced requirements for FSPs providing specific services to ensure suitability of conduct. Regulation 17 (Suitability) of the SEBI (Investment Advisers) Regulations 2013 requires Investment Advisers to consider various factors including the risk profile of the client and the client’s objectives before offering paid investment advice. The SEBI Master Circular for Mutual Funds contains several references to the suitability and appropriateness of products. It requires distributors of Mutual Fund products to ensure that the principle of appropriateness is followed when providing any advisory services. Where non-advisory execution services are being offered, if the distributor believes that a transaction is unsuitable for a customer they are bound to communicate this in writing to the customer.
  • The Insurance regulator, the IRDA, has introduced at least three pieces of draft regulation aimed at ensuring that only suitable products are offered to customers and that insurers act appropriately when selling insurance. The IRDA’s (Draft) Guidelines on Development and Implementation of Prospect Product Matrix by Life Insurance Companies 2012 are specifically aimed at ensuring that the sale of life insurance policies would be based on suitability or needs of the prospect (or client).[10] Its (Draft) IRDA (Standard Proposal Form for Life Insurance) Regulations, 2013 required a determination of suitability to be made in all direct sales of insurance prior to the making of a recommendation by an insurer, agent or broker.[11] Finally, the modified IRDA (Protection of Policyholders’ Interests) Regulations, 2014 (modifying the previous IRDA (Protection of Policyholders’ Interests Regulation of 2002)), in Regulation 3.1(6), provides prospects and policyholders with the right to receive suitable advice at the point of sale and during the subsistence of the insurance contract.[12]

Over-arching “suitability” requirements are also being contemplated for FSPs as part of the draft IFC which will mandate that retail advisors must obtain relevant information about the customer and then provide “suitable advice” to any retail customer.[13]

The draft IFC could therefore set a universal “suitability” benchmark for all FSPs facing retail customers, to ensure that they act appropriately when interfacing with customers. As some of the cases noted above show however, as we seek to achieve a coherent policy and regulatory direction to clarify the ex-ante standard of suitability for FSPs, courts are already moving the law in this direction through their decisions.

[1]        See definition in Oxford Dictionaries, Available here.
[2]        IV(2014)CPJ144(UT Chd.)
[3]        SBI Life Insurance Company Ltd. Vs. Amrit Kaur, III(2014)CPJ96(Punj.)
[4]        Virendra Pal Kapoor Vs.Union of India, 2014(8)ADJ602
[5]        H.B. Gowramma Vs. The Life Insurance Corporation of India Pension and Group Scheme Units Branch 1, 2007ACJ1087
[6]        MANU/DE/2557/2014
[7]        II(2015)CPJ72(NC)
[8]        RBI Charter of Customer Rights
[9]        Paragraph 8.3.1, Comprehensive Guidelines on Derivatives Modifications, RBI/2011-12/243, DBOD.No.BP.BC.  44 /21.04.157/2011-12, 2 November 2011.
[10]       IRDA Exposure Draft: Re: Guidelines on Development and Implementation of Prospect Product Matrix by Life Insurance Companies, Ref: 16/CAD/PPI/PPM/11-12, Available here. (last visited 18 September 2015) (IRDA Prospect Product Matrix Guidelines – Draft).
[11]       IRDA (Standard Proposal Form for Life Insurance) Regulations, 2013, Notification F.No..IRDA/REG./10/68/2013 DATED 16-2-2013, Available here. (last visited 18 September 2015).
[12]       See Exposure Draft: Modified IRDA (Protection of Policyholders’ Interests) Regulations, 2014, Ref: IRDA/Consumer Affairs/2013-14/10, Available here. (last visited 18 September 2015).
[13]       section 120(1) of the draft Indian Financial Code, Available here. (last visited 29 September 2015).


Upholding Customer Protection: Tales from the Indian Courts

By Malavika Raghavan, IFMR Finance Foundation

It is not often that the Supreme Court of India becomes disgruntled by the death of a buffalo. In September 2012, the highest court of the land found itself in just this situation following the death of an insured animal. How did a simple insurance pay-out claimed for the death of a buffalo in 2001 result in proceedings before the Supreme Court eleven years later?

These and other strange questions arose during our exploratory review of cases filed at various forums regarding retail financial products. This blog post is the first in a series presenting vignettes from the review.

The long and winding road


The case of Gurgaon Gramin Bank Vs. Smt. Khazani and Anr.[1] related to events arising after the purchase of a buffalo with a loan from a regional rural bank, and insured by New India Assurance Company Ltd. The animal died within the period of insurance and a claim was filed by the complainant through the bank to be passed on the insurer. Three years passed without any response from the bank or the insurer despite notices being sent to both entities.

Eventually, a consumer complaint was filed in a district consumer forum. The district forum ordered the insurance pay-out to be made, together with interest and costs to the complainant as recompense for litigation expenses and harassment. The bank appealed to the State Commission (the appellate body under the Consumer Protection Act, 1986 (CPA)), which rejected the appeal. The bank moved to the penultimate appellate body under the CPA, National Consumer Disputes Redressal Commission (NCDRC), seeking a review of the State Commission’s decision. The NCDRC dismissed the bank’s petition. A special leave petition was then filed to the Supreme Court by the bank against the NCDRC’s order.

The two judges seized of the matter at the Supreme Court were not impressed by this sequence of events. In a scathing judgment, they condemned the practice of relentlessly pursuing various litigative forums especially where poor rural farmers were involved. Noting that the bank’s conduct was not appropriate, especially since the matter related to questions of fact examined by three other forums, the court ordered substantial costs and dismissed the case. A snapshot of the costs disclosed in the judgment give us an idea of the time and money costs of resolving this case. Remember, the case related to an insurance claim made in 2001 for Rs. 15,000.


We highlight this particular case because of the open-and-shut facts and the consistent rulings made at various levels of the judicial system. In more complex cases of fact and law, despite having valid claims consumers are often left to strategise with their lawyers as to which cause of action to pursue or which forum to approach.

Strategy over substance?

Although complaints regarding deficiency of services or unfair trade practices relating to financial services can be filed at consumer forums established under the CPA, these forums often dismiss cases involving complex questions of facts and law and direct complainants to civil courts as a more appropriate forum.

Several examples of such dismissals exist. A case seeking compensation from the complainant’s bank for allowing opening of a fictitious account (which allowed the other partner in the complainant’s partnership to siphon away money) was dismissed on grounds of complexity and the complainant was directed to the civil courts.[2] Where a complainant claimed that his bank had indulged in unfair trade practices by charging an increased rate of interest without any notice and consent from him, the case was dismissed stating that the determination of whether excess interest was charged on a term loan in existence for several years would require recording of voluminous evidence which was more appropriately done by the civil courts.[3]

However uncertainty persists because higher forums have also overturned such dismissals. For instance, the NCDRC set aside one such dismissal by a State Commission in a case where the cheques linked to a Unit Linked Insurance Plan (ULIP) were sent in the post but not received by the complainant but encashed by someone else.[4] While the State Commission had held that the determination of facts would prove too onerous, the NCDRC refuted this and noted that it was a simple case of principal-agent liability that did not require a civil court to resolve it.

Meanwhile, complainants are also approaching courts other than the consumer forums to varying degrees of success. Our case review revealed direct approaches to the High Court where PSU banks were involved, for instance on grounds that a public entity had infringed constitutional rights by improper sale of ULIPs.[5] Another case filed with the Competition Commission of India alleged that a bank was abusing its dominant positions through unfair and onerous clauses in credit card agreements.[6] Cases in Debt Recovery Tribunals, investor grievances lodged through the SEBI system and complaints with the Banking Ombudsman are just some of the other channels dealing with complaints regarding financial products.

With this multiplicity of forums, one would assume a quick resolution of disputes relating to financial products. However, as the Gurgaon Gramin Bank case revealed, even straightforward cases can face labyrinthine routes to resolution, worsened in situations where the forum has been incorrectly chosen by complainants. The fragmented regulatory landscape can create multiple possibilities—each of which bear the threat of lengthy proceedings.

These (and other) cases in our review indicate that two different questions remain open for further discussion and research: Are courts already discussing what constitutes “suitable” advice and conduct on the part of financial institutions? How can the regulatory architecture evolve a signalling system that will direct case traffic in the direction of the right forum? Subsequent posts in this blog series will seek to tease out responses to these questions by taking stock of existing case law, regulations and policy proposals.

[1]           AIR 2012 SC 2881
[2]           Jayachandra Kumar Vs. Chairman, State Bank of India, 1992(2) CPR 699 (NC)
[3]           M/s. Ganesh Mahal Vs. The Manager, Karnataka Bank Ltd. & Anr, CPR(3) 1995 126
[4]          Raghubir Singh Vs. Unit Trust of India, NCDRC, Revision Petition No. 553 of 2002 (10.10. 2002), MANU/CF/0362/2002
[5]           Virendra Pal Kapoor Vs.Union of India, 2014 (8) ADJ 602
[6]          Shri Pravahan Mohanty Vs. HDFC Bank Limited and Card Services Division of the HDFC Bank, Competition Commission of India, Case No. 17/2010 (23.05.2011), MANU/CO/0020/2011