All’s well that repays well? Not necessarily.

By Vaishnavi Prathap, IFMR Finance Foundation

The past year has seen many commentaries on the rapid expansion of microfinance in India warning of the imminent consequences of unbalanced growth. The most striking statistic in this context — that the average client’s dues more than doubled in just four years (between 2012 and 2016), far outpacing only moderate growth in numbers of branches, employees or clients, and surely clients’ incomes — was estimated from data that, at best, captures only a large proportion of the microfinance market. While this has triggered ruminations of an emergent repayment crisis, these fears have been tempered on two grounds. First, the enforcement of new regulations since 2012 limit the risk of client over-indebtedness. Second, delinquencies have consistently remained low over the expansionary period, and wherever reports of distress have surfaced, they seem mostly uncorrelated with the sector’s growth rate.

But do these arguments show us the full picture? Considered against primary evidence from the financial diaries of low-income households in India, we find that often they do not. The data, collected by IFMR Finance Foundation during a study supported by the CGAP Customers at the Center Financial Inclusion Research Fund, provides rich detail on the financial lives of borrowers in a competitive and mature microfinance market. It reveals that the indicators cited by both arguments above are poorly correlated with the incidence of over-indebtedness and with the ways in which borrowers experience and cope with repayment distress.

Timely repayments and borrower distress are not mutually exclusive

Aggregated data from lenders’ administrative records, such as delinquency estimates published by credit bureaus, have traditionally served to indicate portfolio quality. When delinquencies are low, it is interpreted as a signal of positive borrower outcomes. However, the repayment record may not fairly represent borrowers’ experiences if lending practices emphasize timely collection above all else.

The financial diaries of over-indebted borrowers illustrate this fact. Of the 400 households we studied, nearly one of every five borrowers reported repayment obligations higher than they could reasonably afford, given their incomes and minimum living expenses. Yet, as many as 85 percent of those over-indebted borrowers never missed a repayment on formal loans, arguably since they had strong incentives (both institutional and social) to do so.

Further, the records submitted to bureaus seldom distinguish between repayments made by the client and payments made by group members on her behalf. Thus, perhaps as an unintended consequence of the design of joint liability, the administrative data reveal few meaningful insights at a sector-level on borrowers’ distress or well-being.

Not consumption smoothing but repayment smoothing

How is it possible for so many borrowers to consistently avoid delinquency while carrying multiple, unaffordable loans? The data suggest they are using several coping mechanisms, such as lowering consumption or postponing essential expenses; raising resources from friends and social networks; and using large formal loans when available to settle old debts, including smaller informal ones accrued in past months. This use of coping mechanisms in the face of shocks is not unlike previously documented evidence. Low-income households use a variety of strategies to insulate their consumption and standard of living from the risk of volatile incomes; alternatively, they try to minimize the impact of income volatility by diversifying their occupations and resources. These strategies have a limited ability to protect households from poverty, and it has been shown that severe or persistent shocks are a major cause for chronic poverty.

The use of coping mechanisms by over-indebted borrowers differed from these practices in one regard — the incidence of coping behavior was highly correlated with the unaffordability of household debt and appeared to revolve around insulating repayments rather than consumption. Borrowers with more unaffordable debt used negative coping mechanisms more often and to a greater degree than others. Their financial behavior was not unlike the expected response to an income or health shock. But in this case, the shock came in the form of multiple non-negotiable loan repayments. Unlike a random occurrence, these “repayment shocks” persisted month after month.

Additionally, not only was the level of debt correlated with distress, but also with certain product features embedded in the loan contract. For example, a subset of borrowers experiencing highly volatile cash flows might have more trouble meeting repayments at certain times of the year. We found that these borrowers, for whom repayments were occasionally unaffordable (when calculated against a given month’s income instead of the average), experienced higher levels of distress, almost on par with those for whom the repayments were almost always unaffordable.

The implication for microlending is that poorly matched repayment schedules and other product features could be just as harmful as too much debt — and more harmful if combined with high levels of debt. This is a critical dimension of the experience of over-indebtedness, yet it is often overlooked.

New lending rules to prevent unsuitable loans

It is evident from the observed level of financial distress that current practices to prevent over-indebtedness are not effective. In fact, critical fault lines in their implementation have created an environment where unsuitable credit remains the primary coping mechanism even for over-indebted borrowers. It is also concerning that they focus heavily on limiting the amount of client debt while ignoring other aspects of borrowers’ cash flows that are significant in mediating financial distress. These include large seasonal or cyclical effects for specific lines of income or, even more generally, total income volatility (the median household in our sample experienced monthly income swings as high as plus or minus 45 percent) as well as large and significant uninsured (but insurable) risks.

Beyond better repayment assessments

Microfinance in India is no longer dominated by monopolistic or mono-product markets. With the licensing of several large lenders as small finance banks, the expectation is now that low-income households will have access to better financial services. This means not only easier access to a wider set of services, but services provided by institutions that are better equipped to respond to low-income households’ primary needs and vulnerabilities.

Many have argued that the continued success of lending to low-income households will require the evolution of robust mechanisms to assess clients’ capacity to deploy credit and manage repayments. By itself, this will not be enough to prevent borrower distress since repayments alone do not signal that a loan is suitable.

Lenders must also adequately detect clients’ cash-flow vulnerabilities and respond to them with appropriate design and service improvements, complementary savings and insurance products, flexible repayment schedules where appropriate, and best practices for delinquency management.

Read the latest version of the paper here. This article first appeared on the CGAP blog.


Guidelines for Suitability in Lending to Low-Income Households

By Vaishnavi Prathap, IFMR Finance Foundation

Img_1In December 2014, the Reserve Bank of India published the Charter of Customer Rights as a commitment to protecting the interests of consumers of financial services. The charter includes the Right to Suitability, defined as the principle that “products offered should be appropriate to the needs of the customer and based on an assessment of the customer’s financial circumstances and understanding”. The MFIN and Sa-Dhan, in a joint Code of Conduct, also enshrine a similar principle but specific to the context of lending: “We, as part of the Microfinance Industry promise the customers that we will […] conduct proper due diligence to assess the need and repayment capacity of customer before making a loan and must only make loans commensurate with the client’s ability to repay”. Both the RBI and the SROs directed financial institutions to understand the parameters of suitability within the context of their respective product offerings and to formalize policies to prevent unsuitable sales to customers.

In a new research paper published as part of our Working Paper series, we focus on biggest barrier that financial institutions might face in complying with this directive – a lack of clarity on what may be deemed suitable and how this is to be determined for each client. Towards this end, our new research investigates the nature and incidence of unsuitability in a competitive lending market and the variety of ways in which low-income borrowers may experience or cope with loan-related financial distress. Our findings are both a reality-check on the effectiveness of the current approach to customer protection (particularly the efforts to prevent borrower over-indebtedness) as well as a guide to how, going forward, lenders can institute formal processes to prevent unsuitability.

In our previous writing on this topic, we have acknowledged that successful suitability practices must be iterative and that even at-best, they can in no way guarantee positive outcomes for clients. The focus of both compliance and supervisory efforts must rest instead on understanding patterns in product-client interactions – especially when such interactions result in substantial hardship to clients – and meaningfully improving sales processes to prevent unsuitable sales.

Key Findings

The primary data for this study was collected in a year-long panel survey of 400 low-income households in Krishnagiri district, Tamil Nadu; the full sample included clients of 7+ MFIs and 20+ formal financial institutions. The survey adopted a financial diaries approach and a detailed socioeconomic survey was administered every 4-6 weeks to capture the dynamics of households’ cashflows. The resulting dataset has a primary focus on the details of borrowing and loan servicing but also rich detail on the volatility of occupational income, the frequent incidence of small and large shocks to household budgets and the use of other income sources, resources from social networks and a variety of financial instruments to smoothen consumption, repayment obligations and other expenses.

From the survey, we were able to create a full picture of borrower indebtedness across multiple institution types – perhaps more completely than the credit bureaus for microfinance clients. Comparing the sum of monthly repayment obligations to borrowers’ average monthly incomes, we found that one of every five borrower households in the sample held an unaffordable level of formal debt. If we included informal loans or factored in the volatility of incomes, an even higher proportion held unaffordable levels of debt for a few or all months of the loan tenure. However, the incidence of repayment delays or the proportion of delinquent borrowers was much lower, and only weakly correlated with households’ debt levels. Even at very high levels of unaffordability, borrowers were prioritizing repayments on formal loans over essential expenses, and willing to take on even further unmanageable debt to get through a difficult period.

Further, the average households’ incomes varied month-on-month by as much as 45% and as a result, even borrowers with sufficient year-end surplus were observed experiencing periods of distress and using harmful coping mechanisms comparable to those whose incomes were much lower.

Implications for Suitability Practices

These patterns in borrower behaviour are perhaps not new to experienced practitioners of microfinance and further, may only be a reflection of practices designed to achieve repayment discipline. What is alarming however, is the relative ease with which some over-extended borrowers remained undetected, and were able to continuously receive new formal loans on the same terms as others.

NBFC-MFIs are subject to regulatory directives that restrict the level of indebtedness per client and additionally, a large part of the non-NBFC microfinance lending is also required to be reported to credit bureaus so that it may be available at the time of loan appraisal. Notwithstanding, we find that critical faultlines in the preparation and use of credit reports placed as many as 33% MFI clients in the sample at risk of being mis-sold an unaffordable loan.

More critically, the types of client assessments that inform loan-making are largely unregulated and often do not triangulate borrowers’ actual repayment capacity (relying instead on unverified or indicative measures, peer selection and group enforcement). Our results show that in a mature and competitive market, clients with similar incomes and livelihoods may in fact have very different borrowing portfolios and vice versa. In this scenario, universal lending limits— such as those currently in effect— poorly safeguard customers’ interests.

Instead, determined efforts should be directed towards building market capacity to conduct thorough client assessments and to respond meaningfully to clients’ financial situation. Credit reports urgently need to be strengthened to reflect a comprehensive view of all formal borrowing, without exception. On the lenders’ side, the use of comprehensive “combo” credit reports will still fall short if not also complemented by a robust understanding of what portion of household income can be made available for repayments. Further, clients with unique liquidity constraints or cashflow risks must receive adequate insurance either through appropriate products or through modified terms of service.

This research highlights not only how critical these measures are for borrower well-being, but also the challenges involved in suitably serving low-income households’ financial needs. As a step in this direction, this research outlines two minimum components for suitability assessments –

  1. All lenders should ensure that loan amounts are appropriate and the agreed repayment terms are affordable for every borrower given their income flows, outstanding loan repayments (including self-reported informal loans) and critical payment obligations.
  2. Lenders must also evaluate the harms of selling standardized products to those borrowers with highly volatile cashflows or those with unique liquidity or flexibility constraints. Uninsured cashflow risks must be provisioned for in the assessment, product design or terms of repayment.

The paper also outlines recommendations for coordinated regulatory, practitioner and research effort that can enable successful implementation. 

The working paper is available online here and we welcome both questions and comments.


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.


“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