Banks liable for violating code

Pushpa Girimaji
Pushpa Girimaji

THE Reserve Bank of India may condone violations of its directives by banks, but courts will not. This is the message sent by the apex court in a recent order, where it made it clear that banks will be held liable for the consequences of such violations, if they in any way affect the rights of consumers, or cause them loss, or injury. The national consumer disputes redressal commissionís order has its origin in the complaint filed by three persons against Bank of India (BOI), holding it responsible for their failure to buy shares in a bank, and the consequent financial loss caused to them.

The three complainantsí case was that they asked the Churchgate branch of BOI, with whom they were banking for many years, to issue stockinvests to be enclosed with their applications for allotment of shares of the Corporation Bank for an aggregate amount of Rs 1,01,20,000. This was in October, 1997. BOI issued fours stockinvests, which the clients enclosed along with their applications for shares. The public issue was oversubscribed and the Corporation Bank, in consultation with the Securities and Exchange Board of India, allotted the shares on proportionate basis. However, the three complainantsí applications were rejected on the ground that the stockinvests furnished by them were each of a value far more than the ceiling of Rs 50,000 imposed by the RBI.

So the consumersí argument was that if their applications hadnít been rejected on account of the stockinvests, they would have got a proportionate allotment of 1,24,000 shares. The complainants, therefore, sought a compensation of Rs 10,94,627 towards the net loss on those shares calculated at the market value of Rs 177 per share (minus Rs 80 per share which was the offer price) along with interest at 12 per cent, besides mental agony.

BOI, on its part, argued that it cannot be faulted for issuing stockinvests of higher value than Rs 50,000. It was only following the instructions of its customers. Justice RC Jain, presiding member, and Anupam Dasgupta, member, national commission, however, disagreed. They pointed out that before the bank issued stockinvests, the RBI had issued a confidential circular to all banks on the ceiling imposed on stockinvests. The bank, therefore, was duty-bound to follow that.

Since this was a confidential directive from the RBI, the depositors were obviously not aware of it, and it was the duty of the bank to have advised them on it and ensured that stockinvests of the value exceeding Rs 50,000 were not issued.

Failure on the part of the bank to do so constituted deficiency in the service provided, and the bank has to pay for the consequences. However, for calculating the loss suffered by the consumers, the commission considered the rate at which the shares of the Corporation Bank traded on the date of their listing on December 5, 1997, and on the basis of the closing price on the Bombay Stock Exchange, which was Rs 91.20, calculated the notional loss to the complainants at Rs 1,38,880.

Since they had earned Rs 1,08,173 by way of interest on the returned stockinvests, the commission said the ends of justice would be met if the remaining amount of Rs 30,707 is paid by the BOI along with 9 per cent interest per annum calculated from the date of filing the complaint till the date of payment (KR Srinivasan vs Bank of India, FA No 149 of 2004, decided on December 15, 2009).

This order should also wake up service providers to their duties and obligations vis-`E0-vis their customers. I must mention here that people can now approach the Banking Ombudsman, too, for complaints pertaining to violation of the directives of the regulator. Taking cognizance of the increasing number of such complaints, the RBI has brought such grievances under the purview of the Banking Ombudsman.

Consumers can also complain to the Ombudsman if the bank fails to adhere to the Fair Practice Code as adopted by the bank, or fails to follow the Code of Banks Commitments to Customers issued by the Banking Codes and Standards Board of India. However, in order to haul up banks for such violations, you need to first know what these codes are.

The websites of the RBI and the Banking Codes and Standards Board of India and your own bank should give you ample information on these.