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Thursday, April 08, 2021

Measuring institutional capacity in property tax systems: A case study of ten cities in India

by Diya Uday.

Property tax is ubiquitous with municipal finance. It provides local governments with the means to execute development strategies. In theory, property tax is an ideal candidate for supporting fiscal strategies in decentralised economies because the tax base is immobile making base identification and enforcement relatively easy (Kelly 2013). There are indications, however, that in India, we have not succeeded in doing property taxation well.

A national-level indicator of the performance of property taxes is the percentage of revenue generated from property taxes to the national GDP. Studies indicate that the proportion of revenues from property tax to GDP in India is low when compared with other countries. At the state-level, where property tax is a major source of revenue, there is evidence of revenue shortfalls, indicating the need for reforms. The policy responses for increasing revenues from property taxation, include increasing tax rates, revising taxation criteria and suggesting floor tax rates. But will these interventions be successful in improving the performance of the property tax system in cities?

A key factor in determining the success or failure of any policy intervention is institutional capacity. Policy interventions such as increases in property tax rates assume that ULBs are operating at optimal levels of institutional capacity and therefore increases in tax rates, property values or even improvements in tech infrastructure will optimise revenues from property taxes. In particular, these policies are founded on two main assumptions:

  • that ULBs have adequate human resources and the technical capacity to assess and demand taxes correctly;
  • having assessed taxes correctly, ULBs have the enforcement capacity to collect the entire tax demanded.

To achieve revenue optimisation from property tax it is important to first get tax administration right. Without this, it is unlikely that local governments will be able to capture the full extent of the property tax potential even with tax rate increases or technological interventions. This raises the important question: what is the current capacity of ULBs in property taxation?

In the literature we see indications of deficiencies in the institutional capacity of ULBs in performing some major tax functions like tax collections (World Bank 2004; Mathur et. al 2009; Bandyopadhyay 2014). While these studies give us valuable insights, this literature is not recent. Institutional capacity may have improved over time given the recent concentration of schemes to improve local governance such as the Smart Cities Mission and the Jawaharlal Nehru National Urban Renewal Mission (JNNURM). There is a need for new studies that will give us insights into the current state of institutional capacity.

In this article, we therefore measure the institutional capacity of some property tax functions in a sample set of cities in India. Our aim in doing so is two fold:

  • to gain insights on the current level of institutional capacity in some property tax functions in a sample set of cities.
  • in doing so we attempt to demonstrate that policy interventions must not presume the existence of adequate institutional capacity.

Our findings contribute to the existing literature on the state of property tax administration in India. In addition to this, we question the current approach to measuring administrative functions in the property tax system. We suggest an alternative approach for a more accurate diagnosis of the problems in administration.

A case study of ULB capacity in ten cities

We undertake two levels of analysis. We first examine the institutional capacity of ULBs in property tax collections in a sample set of cities. We then analyse the human resource allocation in the property tax departments in some ULBs. We use our findings to gain insights on institutional capacity in ULBs in a set of sample cities.

Sample selection: Our selection of the cities was driven by the location of the city and the availability of data. Our final selection includes a list of metropolitan and tier-2 cities located across ten different states in India. The selected cities are Chennai, Pune, Indore, Vishakapatnam, Shivamoga, Varanasi, Surat, Warangal, Kota and Bilaspur.

1. Measuring collection capacity

Methodology: We measure collections by calculating the Tax Collection Ratio (TCR), a commonly used method for measuring tax collections. Applying this method, we calculate the TCR as the difference between the tax demand made and the actual tax collected across each of the five years for which the data was available in each of the sample cities (2013-2018). We then calculate the TCR as a percentage value. We use this percentage value as a proxy to demonstrate the level of administrative capacity of a given city by taking 100 per cent as the benchmark. For instance, if the TCR percentage of a given city is 90 per cent, we interpret this to mean that the city has 90 per cent institutional capacity. Such a city has a higher level of institutional capacity when compared with a city in which the TCR percentage is 80 per cent, indicating a higher deficit in tax collections.

Table 1 sets out (i) the average property tax collected in ten cities across five years and (ii) the minimum and the maximum property tax collection across years in the period of study.

Table 1: City-wise average property tax collections (2013-2018)
CityStateAverage TCR (%)Minimum tax collection (as a % of tax demanded in that year)Maximum collection (as a % of tax demanded in that year)
ChennaiTamil Nadu9074 (2013-14)106.60 (2017-18)
PuneMaharashtra96.3687 (2017-18)109.77 (2015-16)
IndoreMadhya Pradesh80.2572.16 (2014-15)106.48 (2016-17)
VishakapatnamAndhra Pradesh114.2924.42 (2017-18)265.52 (2015-16)
ShivamogaKarnataka98.3697.86 (2014-15)99.30 (2016-17)
VaranasiUttar Pradesh9692 (2013-14)98.97 (2017-18)
SuratGujarat84.6576.65 (2015-16)84.21 (2014-15)
WarangalTelangana79.8775.12 (2013-14)82.75 (2016-17)
KotaRajasthan58.8637.04 (2013-14)96.14 (2016-17)
BilaspurChattisgarh90.275.52 (2017-18)122.95 (2013-14)

Source: Author's calculations from Smart Cities Mission data

Findings: We find that no city in the sample has achieved 100 per cent TCR. Only one city i.e. Shivamoga has close to 100 per cent of tax collections. There is a deficit in property tax collection across all the cities in the sample (distance from 100 per cent collection of tax demanded). We do find, however, that half the ULBs in the samples have achieved the goal of 90 per cent efficiency as set by the JNNURM. We also find that there are variations in property tax collection across cities. While in some cities the collections are below sixty per cent (Kota), others have a much higher percentage of collection (Shivamoga and Pune).

We also see a variation in the TCR within the same city. For instance, Kota has a maximum TCR of 96.14 per cent in one year (2016-17) but a low TCR of 37.04 per cent in another (2013-14). Similarly, Vishakpatnam has an over collection of 265.52 per cent in the year 2015-16 but under collection of 24.42 per cent in 2017-18. Even in cities like Pune or Chennai, which have a high average TCR across five years (column 3), the minimum TCR (column 4) and maximum TCR (column 5) vary. In half of the cities in the sample, we also see tax collection exceeding the maximum tax demand in a single year (column 4) for Chennai, Pune, Indore, Vishakapatnam and Bilaspur.

2. Examining human resource allocation

Our second level of analysis examines the human resource capacity in the property tax departments in a set of sample cities. The human resources could affect the TCR in two ways: First, the technical capacity of the human resources to apply the rules correctly. For instance, the ability to correctly identify taxable properties, ascertain property values, apply the assessment formula to a given assessee and determine amounts due. Second, the number of personnel in the department could potentially affect the level of accuracy in tax functions. For instance, an inadequate number of resources could increase inaccuracies. In this analysis, we focus on the second aspect of human resources, the number the personnel to examine whether a higher number officers alone leads to a better TCR.

Methodology: We collected data on the number of officers in the property tax department in the sample cities for which this data was readily available. The cities for which this data was readily available were Chennai, Pune, Vishakapatnam, Shivamoga, Varanasi, Warangal and Bilaspur.

Given the paucity of data on the number of taxable properties in the city, we device an indicator to estimate the number of taxable properties in the city using proxies. For this, we first collect Census 2011 data on the number of households living in permanent structures within the municipal area. We then calculated the number of officers per 10,000 households. We also collect data on the total area (sq. km) of the city and compare this to the administrative strength.

Table 2 sets out the administrative strength of the property tax department, the number of households living in permanent structures within the municipal area, the estimated officer to households ratio (per 10,000 households) and the city area in the sample cities for which this data was available.

Table 2: Comparing city-wise human resource allocation and TCR
CityStateAverage TCR (%)Adminis-trative strength (no. of officers)No. of households in permanent structuresAllocation of officers (per 10,000 households)City area (sq. km)
ChennaiTamil Nadu9027610,40,94831,189
VishakapatnamAndhra Pradesh114.29564,25,40916,501
VaranasiUttar Pradesh963211,64,014191,535

Source: City municipal websites and Census 2011

Findings: We find that some cities with higher a TCR, also have a higher officer to households ratio. For instance, Shivamoga has the highest TCR and the highest level of administrative strength. However, we see that cities with a low TCR, do not have the lowest administrative strength. For instance, Warangal is has the lowest TCR in the sample, but not the lowest officer to households ratio.

We observe that cities with similar TCR scores do not have similar personnel to households ratios. For instance, the officer to household ratios for similar TCR cities such as Varanasi and Pune or Chennai and Bilaspur are false, demonstrating a variation in human resource allocation even across cities with the same TCR levels. Further, cities with a larger area also do not always have a higher allocation of officers. For instance, Varanasi has a smaller area than Vishakapatnam, but a higher number of officers. Chennai has a smaller area than Shivamoga, but a higher number of officers than Shivamogga. We find not consistent pattern in the manner in which human resource allocation is done across cities.

Limitations: (i) We use the number of households living in permanent structures within the municipal limit as a proxy for the number of taxable properties in a city. This does not take into account the commercial property coverage of a city. (ii) Another proxy for the number of properties in a city is the area of a city, however, a larger city may be less dense and have fewer properties than a smaller and more dense city which may have a larger number of properties (iii) The estimates are only as accurate as the data available on government websites.

Learnings for property tax reforms

The findings from our case study offer insights for property tax policy reforms in ULBs:

Presumption of adequate capacity: Our study finds deficiencies in institutional capacity in tax collections across ULBs. From a reforms perspective, even if tax rates are increased, unless the present institutional capacity is improved, revenues from property taxes might continue to be affected. Further, while our study examines the institutional capacity in one tax function - tax collections, it is likely that there are deficiencies even across other functions. This may affect the outcomes from the current set of policy interventions which focus on increasing revenues by changing the design of the tax system rather than fixing the problems in the administration.

Effect of variation across ULBs: Our findings demonstrate a variation in the capacity of ULBs to carry out property taxation. We are therefore likely to see varying levels of success even for the same set of reforms across ULBs because of the different levels of institutional capacity.

Inconsistencies within ULBs: We not only see a variation in the TCR across ULBs, we also see variation in the TCR within the same ULB across different years. This is demonstrated by the variation in the minimum and maximum collection ratios of cities in our sample. This means that even cities with an overall higher average capacity might have low or high collections in a given year. For instance, the minimum TCR in Vishakapatnam is 24.42 per cent across five years and the maximum is 265.52 per cent. Similarly, the minimum TCR in Kota across five years is 37.04 and the maximum is 96.14 indicating a wide variation in the tax collections even by the same authority. While it is unclear why this is the case, this indicates some inconsistencies in capacity levels.

Management of human resources: Our findings indicate that the institutional capacity in property tax systems is not only a function of administrative capacity in terms of the number of personnel. For instance, while we see that Shivamoga has the highest officer to households ratio and the highest TCR, Pune had a lower officer to households ratio but has the second highest TCR. Similarly, despite having a similar TCR, Chennai and Bilaspur have very different human resource allocations. Therefore, increasing the strength of the administration alone may not yield better outcomes in the assessment and collection of property taxes. Instead, improving the technical capabilities of the administration or effective utilisation of the existing human resource capacity by ULBs might yield results. For instance, Bahl et. al 2013, suggest that tax authorities in developing countries are unable to capture economies of scale.

A new approach to measurement

In the course of this study, we found that the existing approach to the measurement of tax functions in the literature has two main problems. First, studies examine tax collections as an isolated administrative function and not as a product of the preceding tax functions. Second, because of this, these studies tacitly assume that the administrative processes that precede tax collections, such as the tax assessment and all the processes that make up tax assessment are accurately done. This in turn affects the diagnosis of the problems in administration.

We posit instead, that the property tax system comprises of a series of interconnected administrative processes that determine the overall outcome of revenue generation from property tax. Each process determines the success of the next. Errors in administering one process will have repercussions for the accuracy and success of the processes and functions that follow. For instance, tax collection is not just a product of the enforcement function of the ULBs. It is also a function of accurately assessing taxes due. Similarly, the accuracy of the tax assessment function is determined by (i) the maintenance of a database of all taxable properties in the city (ii) regular updation of this database, (iii) correct valuation of the properties in the database, (iv) correct application of the tax formula for these valued properties and (v) determining permitted exemptions. Table 3 set outs an indicative list of the functions that work to together form a chain of administrative processes which ultimately determine tax collections.

Table 3: Indicative list of processes involved in tax assessment and collection
A. Accurate tax assessment i. Maintaining a property records database of all taxable properties
ii. Updating the property records database
iii. Correct valuation of properties in the database
iv. Correct application of the tax formula
v. Correct determination of exemptions and concessions
B. Accurate tax collectioni. Making a correct tax demand (= Ai+Aii+Aii+Aiv+Av)
ii. Enforcement to collect tax demanded

When we break down administrative functions into smaller processes and view each function as being linked to the next, the result of measuring of any one administrative function will provide us with insights on the accuracy of not just the function being measured but also the previous functions in the chain of administration. For instance, the TCR of a ULB is an indication of the institutional capacity of not only tax collection but also of assessing tax correctly and getting the processes associated with the functions of assessment and then collection right. In this view, a TCR of 90 per cent potentially indicates not only a failure by the ULB to recover 10 per cent of the tax demanded but also potential inaccuracies in assessment for 10 per cent of the tax demanded, leading to appeals and pending cases on account of which payment might not have been done by assesses.

Our learnings from the case study, therefore, are not indicative of capacity issues just in tax collection, but could also be on account of inaccurate tax assessments. This analysis, in line with reports on poor tax assessments in ULBs.

This approach has two advantages over the traditional approach. It breaks down and highlights all the processes involved in property tax administration. In doing so, it allows us to more accurately diagnose the specific function at which the process fails.


We carried out this case study to demonstrate the importance of institutional capacity in the property tax system of ULBs. We have two main findings which are as follows:

First, we demonstrate that the problems in institutional capacity exist across a majority of our sample cities. This signals that there are potential capacity problems in many if not all cities across India. It is unclear therefore whether the present set of interventions to increase property tax revenues will yield optimum outcomes. Our findings demonstrate that it is important to precede policy interventions with the measurement of institutional capacity in the property tax system. We cannot presume the existence of adequate institutional capacity. This is in line with the literature that suggests that infrastructure and institutions are the foundation for achieving effective policy outcomes (Kelkar and Shah 2019, Pritchett et al 2012, Subramaniam and Felman 2021).

Second, deficits in the TCR are not just signals for improving capacity in tax collections and enforcement but also in tax assessment and all allied administrative processes. It is therefore difficult to diagnose which part of the property tax administration requires reform. A failure at any one point of the system has repercussions for the remaining functions. We, therefore, need a comprehensive framework for measuring institutional capacity at the level of each process of the property tax system, some of which are illustrated in Table 3.

Our study also demonstrates that while most cities have some way to go, some cities have achieved higher levels of TCR than others, indicating that they have perhaps learnt to do assessments and collections better than others. We also see that some cities appear to have achieved better utilisation of administrative strength than others. There are perhaps lessons in tax assessment and collection in these cities that other ULBs in India can learn from. A case study of the good practices in collection and assessment in these cities might offer insights for better property tax administration in other cities in India.


Arvind Subramaniam and Josh Felman, The Economy and Budget: Diagnosis and Suggestions, January 2021.

Matt Andrews, Lant Pritchett, Michael Woolcock, Looking Like a State: Techniques of Persistent Failure in State Capability for Implementation, CID Working Paper No. 239 June 2012.

O. P Mathur, Debdulal Thakur and Nilesh Rajyadhyaksha, Urban Property Tax Potential in India, National Institute of Public Finance and Policy, 2009.

Roy W. Bahl, Johannes F. Linn and Deborah L. Wetzel, Governing and Financing Metropolitan Areas in the Developing World, Lincoln Institute of Land Policy, Pages 1-30, 2013.

Simanti Bandyopadhyay, Municipal Finance in India: Some Critical Issues, ICPP Working Papers 14-21. May 2014.

Roy Kelly, Making the Property Tax Work, ICEPP Working Papers. 42, 2013.

Vijay Kelkar, Ajay Shah, In Service of the Republic: The Art and Science of Economic Policy, 2019.

World Bank, India: Urban Property Taxes in Selected States, 2004.

Diya Uday is a senior researcher at the Finance Research Group, Mumbai. The author would like to thank Ajay Shah, Susan Thomas and the anonymous referee for their valuable insights, comments and guidance for this work.

Thursday, March 25, 2021

Towards better enforcement by regulatory agencies in India

by Trishee Goyal and Renuka Sane.

India is on the verge of establishing yet another regulator, the Data Protection Authority (DPA), to implement the provisions under the Personal Data Protection Bill, 2019. As per the Bill, the DPA will regulate anyone who collects data for commercial use with a turnover of more than INR 20 lakh annually. This would cover entities from small time telemarketers to social media behemoths. The scope of its regulated entities will thus be more extensive than any of the regulators previously established in India. The DPA has the power to either suo motu or on a complaint take action against a data fiduciary or a data processor who may be violating the law. It can, inter alia, issue directions, call for information, conduct inquiries, issue orders for injunctive relief, suspend or cancel the registration of businesses.

With such an expansive responsibility, it is important to get the design of the enforcement processes of the DPA right. Failure to follow due process in enforcement would be damaging to the ease of doing business, to the digital and start-up ecosystem and damage India's chances of dominance in these spheres. More importantly, such failures will have adverse consequences on the justice and dignity of the regulated entities.

In a new working paper, Towards better enforcement by regulatory agencies, we study the gaps in enforcement at the Securities Exchange Board of India (SEBI) and the Competition Commission of India (CCI). The gaps pertain to whether processes of natural justice have been adhered to during the conduct of enforcement activities. We reflect on the lessons this might have for the DPA.

In India, there exists a small literature on the problems with the legislative functions (some examples include Burman and Zaveri, 2018; Bhandari and Sane, 2019), and the judicial functions (see Datta et. al., 2019). In this paper we focus on the executive, or the enforcement, functions of a regulator. Our paper also connects to a larger literature across the world on the dilution of accountability at the 'new administrative state'. Administrative agencies are increasingly built with legislative, executive and judicial mandates. Such agencies are expected to draft subordinate legislation, be responsible for licensing and enforcement actions, and also adjudicate on investigations usually carried out by itself. Questions on checks and balances and due process that were reasonably settled in liberal democracies when it came to government functioning are now being debated once again w.r.t regulators.

Why SEBI and CCI?

Before we discuss questions on natural justice, a word on why we chose to study SEBI and CCI. The Justice Srikrishna Committee Report on data protection suggests that the DPA will be modeled along the lines of other Indian regulators such as TRAI, SEBI, CCI etc. Among the regulators discussed in the report, we found that SEBI has been considered the most effective, as far as its enforcement actions are concerned. CCI is relevant as it is a more recently established regulator. A study of CCI comes at an interesting checkpoint in the development of regulatory governance. As the DPA will be modeled on these regulators, it is important to understand how enforcement is currently taking place and whether there is an inherent problem in the structure of enforcement. For example, Roy, Shah, Srikrishna, and Sundaresan (2019) argue that Indian regulators have too often veered into controlling as opposed to regulating, and that enforcement has been selective and weak, and failed to adequately follow the rule of law, especially on due process. State capacity is known to be weak in India, suggesting the need to move beyond existing models of regulatory design.

Three elements of natural justice

Natural justice is a vast area. We focus on the three most basic elements of natural justice - how are notices served, whether parties are allowed to examine material and cross-examine witnesses, and whether there is separation of powers, especially between the investigation and adjudication functions.

Procedural failures at SEBI and CCI

In the case of SEBI, we studied orders of the Securities Appellate Tribunal (SAT) for a six month period (October, 2019 to March, 2020) where we found that 33% of SEBI orders were over-ruled on failure to adhere to principles of natural justice. Of the cases over-ruled, 86% were related to issues of notice and 14% to issues of examination of materials. SEBI fares poorly on separation of powers. With respect to CCI, a survey of appellate orders passed by the Competition Appellate Tribunal and the Supreme Court, pointed to the lack of due process being ingrained in enforcement procedures. However, CCI maintains separation of powers with a far greater degree as compared to SEBI. The design of the enforcement structure also allows for application of mind by the Commission at multiple stages - at the time of formation of prima facie opinion, at the time of issuance of direction for investigation and lastly, at the time of penalty proceedings.

Importance of codification

Why is it that there are such procedural failures? Legislation in India confers certain powers of a civil court to a regulatory agency, and expects that the regulator will comply with the principles of natural justice. There is, however, no guidance on how regulators should comply with these principles (Burman & Krishnan, 2019; Sundaresan, 2018). Common law in India has held the view that principles of natural justice are not considered embodied rules -their application has been made dependent on a variety of factors such as the nature of the tribunal in question, the controversy in question and the facts and circumstances at hand. As a result, the development around principles of natural justice in administrative law has been in an ad hoc manner. There is very little by way of standardised procedures that an administrative body can source from common law.

What would improve these processes? We look at the structure of regulators in other countries - namely the US and the UK. We find that the processes that Indian law just assumes will be followed, are actually codified in laws, regulations and process manuals in these countries. Codification is important as a study of CCI also shows - while the CCI does better in terms of structural separation, issues of due process continue to remain due to scanty guidance available in the Competition Commission of India (General) Regulations, 2009 on other aspects. Codification of processes on legislative powers, such as having more prescriptive rules on the requirements of consultation, have led to better regulation making processes (Burman & Zaveri, 2018).

Lessons for the DPA

We have the following recommendations for the DPA. The objective is to provide adequate guidance to the regulator as it discharges the enforcement function, as well as to the broader community as it continuously evaluates the performance of the regulator on these counts.

  1. There should be an inclusion of the procedural rights in the statute itself. These provisions would specify a detailed outline of the show cause notice, the scope of the right of examination of materials, the procedure to be followed in case of ex-parte orders and the timelines of providing representation against each of the processes where such representation can be made.

  2. Further, regulations should include the manner in which notice is to be served, the manner of providing opportunity of hearing (written submissions), the form in which materials are to be submitted to the regulated entity under its right of examination of materials etc.

  3. The law, regulations, as well as detailed manuals should be available in the public domain.

  4. At the very least, there should be a cadre of administrative law officers who would not be engaged in any functions of the regulator except performing the quasi judicial functions. There should be an Administrative Law Member in the Board of the agency whose specific task would be to manage the cadre of administrative law officers. This would lead to the insulation of quasi judicial functions of the regulator from executive, investigation and inspection functions.


The concerns raised by us have begun to get recognised in India. For example, in 2011, the Financial Sector Legislative Reforms Commission (FSLRC) Report laid out a regulatory framework imbibing the principles of natural justice. More recently, in 2019, the Report of the Competition Law Review Committee, reviewed the enforcement processes in the CCI. Similarly, the Sahoo Committee Report set up to examine development and regulation of valuation professionals, while laying out the regulatory design for the said purpose, emphasised the need of principles of separation of powers, reasoned orders, independence and accountability. The follow through on the recommendations, however, has been scarce. We think that a statutory formulation of the administrative law requirements would strengthen the rule of law in enforcement actions.


Bhandari, V., and Sane, R. (2019) A Critique of the Aadhaar Legal Framework. 31 NSLIR Rev 1-23.

Burman, A., & Krishnan, K. (2019). Statutory regulatory authorities: Evolution and impact.

Burman, A., & Zaveri, B. (2018). Regulatory responsiveness in India: A normative and empirical framework for assessment William & Mary Policy Review , 9 (2), 1-26.

Datta et. al. (2019), How to Modernise the Working of Courts and Tribunals in India. NIPFP Working paper 258.

Roy, S., Shah, A., Srikrishna, B. N., & Sundaresan, S. (2019). Building state capacity for regulation in India. Devesh Kapur and Madhav Khosla (eds.), Regulation in India: Design, Capacity, Performance, Oxford: Hart Publishing.

Sundaresan, S. (2018). Capacity building is imperative. Column titled Without Contempt in the editions of Business Standard dated August 2, 2018.

The authors are researchers at NIPFP. This paper was produced as part of the Data Governance Network. We thank Somasekhar Sundaresan for useful discussions.

Tuesday, March 23, 2021

Strategic patience and flexible policies: How India can rise to the China challenge

 by Gautam Bambawale, Vijay Kelkar, Raghunath Mashelkar, Ganesh Natarajan, Ajit Ranade, Ajay Shah.

A paper, Strategic patience and flexible policies: How India can rise to the China challenge, has been released by the Pune International Centre. Key ideas of this paper are presented here.

After the war in 1962, the India-China relationship was frozen till 1988. After that, both sides agreed on a framework of holding border disputes in abeyance and pursuing increasing economic engagement. Procedures and protocols were established for handling situations on the border, if they should arise.

In recent years, China has dismantled this arrangement and established a more hostile stance towards India with simmering military conflict. This raises important questions for policy in India. How should India navigate this landscape? When the conflict became kinetic in Doklam and then Ladakh, the immediate impulse was of course about mobilising troops. There was an outcry in the press, nationalistic fervour, and emotional boycotts of Chinese goods.

It is important to see these problems on a larger scale, in terms of space, time and force. It is not just about a few weeks in Ladakh involving a few thousand troops. There is much more at play. If India merely responds with troop movements and winter gear, this may set the stage for future reverses. Indian thinkers need to address deeper questions. What are the forces shaping Chinese behaviour? What is the best path for India in the short term and the long term? How can diplomacy and economic policy work in an intertwined fashion, to best further India's interests?

At present, India is in a weak position when compared with China. Whether we look at raw GDP, state capacity, the capabilities of the best firms, the extent of internationalisation, the mastery of science and technology or the quality of the top intellectuals: at present, China is significantly ahead of India. This superiority can be used by China to put pressure on India in many ways. Some examples of this include a sheer display of military strength to grab land at the border, the use of a variety of levers to foster friction for India with neighbouring countries, and nudging decision making at international organisations in ways that hinder India's interests.

Looking into the future, if the gap between Chinese and Indian economic growth rates continues, these problems will be amplified. As an example, we must visualise a future scenario where Chinese carrier groups prowl the Indian ocean, and the Indian navy is out-matched.

In this scenario, how best should India proceed? There is a useful distinction between the short run and the long run.

In the short run, Indian diplomacy faces a new situation. Never before has India faced a hostile nation with significantly superior strength. China in 1962 was at roughly Indian levels of GDP; Pakistan is a smaller country. This is the first time that India has   hostilities with a substantially stronger nation. Confronting China alone would be unwise. It is essential to build coalitions.

There are three groups of natural allies for India: the great democracies of the world, who worry about the global prominence of an authoritarian China; the countries on China's borders, who are all facing difficulties just as India is; and the countries in India's region who can potentially have positive exposure to Indian success given that proximity matters greatly in cross-border economic and cultural activities.

India needs to embark on a process of building deep ties with about 20 countries. The genuine depth of these relationships requires linkages in trade, finance, investment, education, travel, migration and shared values. India will need to modify domestic policy positions in ways that suit the interests and values of these partners. Diplomacy needs to play a much bigger role in domestic policy making, than has ever been the case in Indian history. The coming decades need to become a golden age of diplomacy.

In the short run, there is debate about protectionist measures that will harm Chinese exports or investment in India. A significant proportion of those moves are self-defeating in that they harm India more than they harm China. There is a case for three groups of restrictions : Limit companies controlled by the Chinese state from a controlling stake in a hotlist of sensitive infrastructure assets; steering clear of Chinese-controlled technological standards; and blocking surveillance of Indian persons.

Strategic thinkers in Indian firms need to rethink business plans in the light of these complexities. In some areas, China-centric sourcing and technological dependance can elevate business risk. For these, a selective retreat from economic engagement with China, and increased emphasis upon the global market, is optimal. In other areas, India can become the dominant alternative to the China-centric supply chains of the past, addressing the desire of global firms to reduce their exposure to China.

In one scenario, India remains smaller than China for an indefinite future, and the strategy of coalition-building will remain central. There is, however, the possibility that India can roughly match Chinese strength in about 20 years. This is not just wishful thinking, and this is not predicated upon Chinese stumbles. It requires reversing the growth malaise of the post-2011 period. This requires foundational change in public policy frameworks around three main ideas: the increasing scale of government micro-management of the economy, the expanding administrative state and the growing erosion of the rule of law. A critical element of this 20-year journey lies in innovation policy. India needs to match and improve upon China's achievements in fostering research institutions and the intellectuals that inhabit them.

Becoming an advanced economy has always been the objective in India, right from the freedom movement and the creation of the Republic. What has changed in recent years is Chinese hostility, which has given a fresh dimension of urgency on solving the growth malaise, on learning how to be a mature market economy located in a liberal democracy. The judicious use of self reliance ("atmanirbhar") grounded in self confidence ("atmavishwas"), where a confident India engages with the world without insecurity, forms alliances with like minded countries, and leverages democracy and a skilled workforce to good effect, is the path through which the China challenge can be addressed.

Gautam Bambawale is former Ambassador of India to China, Pakistan and Bhutan. Vijay Kelkar is Vice-President, Pune International Centre. Raghunath Mashelkar is President, Pune International Centre. Ganesh Natarajan is Chairman of 5F World and of Lighthouse Communities. Ajit Ranade is Chief Economist, Aditya Birla Group. Ajay Shah is Research Professor of Business, Jindal Global University.

Grievance Redress by Courts in Consumer Finance Disputes

by Karan Gulati and Renuka Sane.

India has made progress on financial inclusion through the use of digital payments and fintech. As more and more consumers interact with the consumer finance industry, there will invariably be greater frictions and an increasing number of grievances. In an environment with a good consumer complaints system, these should get resolved by the financial service provider (FSP), and if not the FSP, then the regulator. However, this is not so in India. Courts are often the preferred recourse for retail consumers. For example, in the ongoing dispute regarding Yes Bank's written off AT-1 bonds, consumer courts seem like the last remaining alternative for retail investors. Unless grievances are satisfactorily resolved, we may hurt the progress made on financial inclusion. While India needs to set up good regulator-based grievance redress mechanisms such as a Financial Redress Agency, it also needs to improve the functioning of courts to provide effective relief in consumer finance (and other)disputes. In a recent paper, Grievance Redress by Courts in Consumer Finance Disputes, we review 60 judgments on consumer finance to study the position that courts have taken on these disputes. We also describe the challenges in court functioning that have a bearing on the efficiency of courts in dealing with issues of grievance redress.

The structure of courts

In 2020, India enacted a new Consumer Protection Act (CPA). The Act aims to protect consumers' interests and provide timely and effective settlement of disputes. It entrusts courts to redress consumer grievances. A complainant can approach specialised courts i.e. consumer commissions established by the CPA. However, these are additional remedies. Cases may also be decided by the High Court of various States and the Supreme Court of India.

The powers to grant relief depend on which court the complainant approaches. Consumer commissions are bound by the CPA. They may order a party to: (i) remove defects, (ii) return the price of the goods or the charges for the services along with interest, (iii) pay compensation or punitive damages, and (iv) withdraw the goods or services from the market. High Courts are bound to decide cases either within the confines of a statute under which they are approached or the constitution. Going one step further, the Supreme Court has held itself not restricted in any way to grant adequate relief.

Banking and insurance disputes

Litigation is disproportionately costly and troublesome for small consumers. Very rarely can an ordinary consumer go through the prolonged ordeal of fighting with a bank. For this reason, courts have granted relief to individual consumers, given that they come with clean hands.

This has not been the case when interpreting insurance contracts. If consumers knew about the terms, courts have enforced the terms of the contract, regardless of whether the terms themselves were unfair, one-sided, or opaque. On the other hand, if the terms were kept hidden from the consumer, courts have granted relief to consumers. This is true both while entering the contract and settling claims.

Several consumers have been introduced to complex products and contracts, but these consumers have insufficient know-how. They are vulnerable to mis-selling. The strategy in Indian finance has historically focused on the caveat emptor doctrine -- let the buyer beware. Though the new CPA gives consumer commissions the power to declare certain unfair terms as void, it does not address the ability to understand the terms. Thus, consumers have been left to their own devices, and unaware consumers are unlikely to get their desired remedy if they approach a court.

Challenges to court functioning

We find the following challenges in court functioning as they deal with consumer finance disputes.

  1. Low Compensation: Courts tend to award low compensation that does not adequately compensate the complainant. For example, in Dr Virendra Pal Kapoor v. Union of India and Ors, a senior citizen had invested INR 50,000 in a unit-linked product in 2007. Upon payout in 2012, he had lost the entire sum except INR 248 on account of hidden charges. Though the insurer was directed to repay the original Rs. 50,000, no interest was awarded. The reason for low compensation seems to be that there are no guidelines for courts to follow. There is no expert analysis of the loss. In the absence of financially prudent legislation, courts often tend to award compensation that only makes sense when the legislation is enacted.

  2. Delay: Low compensation becomes more severe when it takes too long to settle disputes. The CPA provides that cases should be decided in no more than five months. However, as per the case management system of the National Commission, it takes 1.99 and 2.38 years to settle banking and insurance disputes, respectively, i.e. more than five times the statutory guideline. In fact, in February 2020, the National Commission adjourned a matter till January 2021 - almost a year after the hearing.

  3. No Class Action: If consumers cannot understand complex financial agreements, they may benefit from pooling their knowledge and approaching courts as a class. Plaintiffs can share evidence, expert witnesses, and litigation costs. However, unlike other countries, such suits are few and far between in India. This may be because of unclear substantive law and strict rules on financing litigation. This makes it difficult for class members to come together. Courts have left it to their discretion to evaluate whether the class is adequately represented and whether financing agreements are fair. Moreover, the legislature had prohibited contingency fees. This creates a system that either prohibits or disincentives class actions.

  4. Specialisation: Consumer courts in India resolve all consumer disputes. Though the members are highly qualified individuals, they lack specialization in finance. This is unlike other common law countries where sectoral experts adjudicate finance disputes. They have adopted extensive adjudicatory legislation regarding financial products and services. On the other hand, laws in India regarding finance have been restricted, leaving courts to start from a clean slate. If timeliness and predictability can make India's finance regime more appealing, specialization by adjudicators could prove valuable.

Way forward

One obvious way to improve the system is by general improvements in the judiciary's capacity and knowledge on matters related to finance. This will, however, take a long time. Policymakers should also consider adopting certain targeted interventions.

There are two types of interventions that are required. The first is on the legislative front. Like the targeted legislation in other countries, the legislature could enact separate rules for financial transactions mandating clear and understandable disclosures. Policymakers may also consider prescribing adequacy requirements in class action suits and transitioning towards contingency fees for lawyers and third-party investors. Any such changes in legislation would also benefit from an advisory council on consumer finance. The council may be responsible for making representations about policies; reviewing, monitoring, and reporting their effectiveness; and highlighting its views on new rules and regulations.

The second is on the judicial front. One problem we identify is low compensation. This may be addressed by updating and consolidating the rules governing compensation considering modern market understanding. Other jurisdictions often order disgorgement (surrender of profits earned through illegal means) or grant a remedy of restitution. This seeks to measure actual damages. On the question of delays, courts may also separate their judicial and administrative functions. This will likely reduce the time it takes to conclude hearings since members of the commission would have more time to focus on their judicial tasks. The National Commission can also exercise its power to call for statistics from State Commissions and conduct systematic reviews.

These solutions can have significant consequences, especially in India, where financial literacy is low and regulatory enforcement appears weak. Though they were developed after studying consumer finance disputes, they may have consequences outside this domain and yield better functioning courts. Market-oriented compensation, without delay, when parties can come together as a class would be beneficial in any dispute. In a growing financial landscape such as India, redress bodies such as the judiciary become increasingly important. A specialized consumer protection law is a step in the right direction, but it can benefit from targeted interventions.


Department of Economic Affairs, Report of the Financial Sector Legislative Reforms Commission: Volume 1, March 2013.

Dhirendra Swarup, Establishing the Financial Redress Agency, January 27 2017, The Leap Blog.

Dr Virendra Pal Kapoor v. Union of India and Ors, May 29 2014, Allahabad High Court.

Karan Gulati and Renuka Sane, Why do we not see class-action suits in India? The case of consumer finance, May 03 2020, The Leap Blog.

Karan Gulati and Shubho Roy, India's low interest rate regime in litigation, March 11 2020, The Leap Blog.

Murali Krishnan, Supreme Court urges consumer forum to look into grievance of year-long adjournments, August 16 2020, Hindustan Times.

National Informatics Centre, Computerization and Computer Networking of Consumer Forum in the Country.

Neil Borate, Those mis-sold Yes Bank AT1 bonds face long haul, May 11 2020, LiveMint.

Pratik Datta, Mehtab Hans, Mayank Mishra, and others, How to Modernise the Working of Courts and Tribunals in India, March 25 2019, NIPFP Working Paper No 258.

Reserve Bank of India, National Strategy for Financial Inclusion, January 10 2020.

Supreme Court Bar Association v. Union of India, April 17 1998, Supreme Court of India.

Tinesh Bhasin, RBI sees 387% rise in complaints against NBFCs, 58% rise against banks, February 08 2021, LiveMint.

The authors are researchers at NIPFP.

Monday, March 22, 2021

How large is the payment delays problem in Indian public procurement?

by Pavithra Manivannan and Bhargavi Zaveri.

Payment delays are endemic in government contracts in India. Businesses generally factor payment delays into the price of public sector contracts. Measuring the size and extent of overall payment delays from the government to vendors and contractors has, however, been a challenge. In this article, we use a novel data-set put together from public sources to ascertain the size of the payment delays problem in Indian public procurement.

When a private entity delays contractual payments, the delay is factored into the price of the next vendor contract or the debt contracted by the private entity. This feedback loop naturally instills payment discipline by aligning the payer's incentives with maintaining payment discipline. This is harder to achieve for government contracts, as information about payment delays in public procurement is often sparse, difficult to discern from budgetary statements or missing altogether. The problem is compounded as the state procures goods, services and works at various levels and through various entities owned by it. Payment delays affect the working capital cycle of vendors of all sizes. However, payment delays have a particularly deleterious impact on Micro Small and Medium Enterprises (MSMEs), which often have limited access to formal financial systems to bridge their working capital requirements. Timely payments, therefore, are of crucial importance to MSMEs as they rely on their cash-flow cycle to fund their working capital requirements.

Payment delays in contracts with CPSEs

A significant proportion of overall central government procurement is undertaken by centrally owned public sector enterprises (CPSEs). Most CPSEs are incorporated as companies and many of them are listed. We use the information in the annual results of CPSEs as a proxy to ascertain the scale of payment delays in the public procurement undertaken by the central government. We study the balance sheet and annual reports of listed CPSEs for the last three financial years, 2017-18, 2018-19 and 2019-20 ("study period").

We find that CPSEs had annual average outstanding trade payable of Rs.1.30 trillion as against an annual average procurement value of Rs.0.3 trillion, during our study period. This suggests that the annual average outstanding trade payable of CPSEs were 5 times larger than the annual average procurement undertaken by the CPSEs. Further, we find that on an average, payments worth 8% of the total value procured from MSMEs are delayed for more than 45 days from their due date. Finally, we find that CPSEs demonstrate weak payment discipline towards all their vendors, and that the MSME vendors are not worse-off than the other vendors. This suggests that in the case of government contracts, the imbalance of the relative negotiating power of MSME vendors and non-MSME vendors has limited impact on the behaviour of the payer.

Our work demonstrates the potential to develop an ongoing system to measure payment discipline in public procurement, which could then act as a feedback loop for pricing vendor contracts when dealing with CPSEs and the government departments to which they are aligned.

Data and methodology

Our analysis is based on a hand collected data-set put together from the following two public sources of data:

  1. the MSME Sambandh portal set up by the the Ministry of Micro, Small and Medium Enterprise in 2017, to monitor the implementation of the Public Procurement Policy, 2012;
  2. Annual reports and annual balance sheets published by CPSEs.

Our data-set consists of firm level information about CPSEs, such as the year of their incorporation, listing date, industry classification, variables indicative of their financial health and the procurement undertaken by them. We augment the data-set with information on payments delayed by CPSEs to MSME suppliers beyond 45 days from the date on which such payments became due (hereafter, "delayed payments"). The Micro, Small and Medium Enterprises Act, 2006 (MSME Act)requires all companies that procure goods, services and works from micro, small and medium enterprises to disclose such payments in their annual report in the prescribed format.

Our data-set covers this information for 57 listed CPSEs. We collect the data for these CPSEs for three financial years beginning with the year in which the MSME Sambandh Portal was set up. This gives us data for the financial years, 2017-18, 2018-19 and 2019-20, which is our study period.

These 57 CPSEs are spread across 17 departments or ministries of the Central Government, with the largest number concentrated under the Ministry of Petroleum and Natural Gas (19.3%), followed by the Ministry of Power (10.53%) and the Ministry of Steel (8.77%). The CPSEs in our data-set are spread across 34 industries, as per the National Industrial Classification (NIC) scheme prescribed by the Ministry of Statistics and Programme Implementation (MoSPI). CPSEs in the business of 'electricity, gas, stem and hot water supply' account for the largest group (12.28%) followed by CPSEs engaged in the business of manufacturing coke, refined petroleum products and nuclear fuel (8.77%).

Each CPSE reports a target procurement value at the beginning of the financial year and the actual procurement value at the end of the financial year, on the MSME Sambandh portal. Table 1 shows the aggregate value of goods, services and works targeted and actually procured by the CPSEs in our data-set across different government departments.

Table 1: Procurement by CPSEs

No. of
(Rs. crore)
(Rs. crore)

Department of Chemicals and Petrochemicals 2 371.66 308.38
Department of Commerce 2 17.28 18.3
Department of Defense Production 3 1963.33 2880.47
Department of Fertilisers 4 2547.34 2641.74
Department of Heavy Industry 4 16392.1 15209.25
Department of Telecommunications 2 0 0
Ministry of Coal 2 5977.39 1774.82
Ministry of Defense 3 5838.79 7066.05
Ministry of Housing and Urban Affairs 2 12.61 12.67
Ministry of Mines 2 2573 7132.09
Ministry of Petroleum and Natural Gas 11 52175.63 63849.08
Ministry of Power 6 6142.97 6608.55
Ministry of Railways 4 395.07 429.31
Ministry of Science and Technology 1 38 17.49
Ministry of Shipping 3 1725.67 1321.45
Ministry of Steel 5 4556.4 5356.22
Ministry of Tourism 1 125.07 34.85

The Ministry of Petroleum and Natural Gas is the largest procurer in our data-set, both in terms of the number of CPSEs and the value of goods, services and works procured by them. Table 1 also shows that a majority of the CPSEs have procured more than their annual targeted value. We observe this to be true across all the three financial years comprised in our study period.

Findings: CPSEs' outstanding dues

Trade payable are a rough proxy of the amounts due from a firm to vendors and service providers. We use the data on outstanding trade payable from the balance sheets of CPSEs as an estimate of payment delays in public procurement. Table 2 shows the three-year annual average outstanding trade payable due from the CPSEs in our data-set. The second column indicates the corresponding annual average value of procurement undertaken by these CPSEs, and the last column indicates the average outstanding trade payable as a percentage of the average annual procurement undertaken by the CPSEs.

Table 2: Average outstanding trade payable and procurement value

Procurement value
(Rs. crore)
Outstanding payable
(Rs. crore)
Payable/ procurement

Department of Chemicals and Petrochemicals 7.75 106.11 1369.37
Department of Commerce 13.58 1119.66 8243.86
Department of Defense Production 889.55 3449.92 387.83
Department of Fertilizers 532.30 1971.93 370.45
Department of Heavy Industry 4203.14 10297.54 245.00
Department of Telecommunications 0.00 2313.67 0.00
Ministry of Coal 225.45 1898.59 842.13
Ministry of Defense 1954.01 3031.90 155.16
Ministry of Housing and Urban Affairs 4.84 2709.40 56030.74
Ministry of Mines 513.57 1227.54 239.02
Ministry of Petroleum and Natural Gas 15951.71 82830.09 519.26
Ministry of Power 2338.59 7907.65 338.14
Ministry of Railways 193.66 1243.77 642.25
Ministry of Science and Technology 0.32 29.38 9180.60
Ministry of Shipping 346.50 1562.02 450.79
Ministry of Steel 1274.48 8739.99 685.77
Ministry of Tourism 15.48 58.94 380.88

Total 28464.94 130498.11 458.45

While the procurement value of a given financial year does not necessarily mean that the entire value of the contract becomes payable in the same financial year as the procurement contract may span across multiple years, the three year average numbers in Table 3, however, show a systemic break-down in the payment discipline of CPSEs. We speculate that these trade payable would have aggregated over time, and do not necessarily pertain entirely to the study period.

We then look at three departments/ ministries that account for the largest procurement by value in our data-set, to investigate the differences in the payment behaviour of CPSEs towards MSMEs and non-MSME vendors (Table 3). The CPSEs in these three departments also account for nearly 75% of the total outstanding trade payable of all the CPSEs in our data-set.

Table 3: Outstanding trade payable of CPSEs (as percent of value procured)

2017-18 2018-19 2019-20 Total

Department of Heavy Industry 84.02 7.87 80.87 15.82 110.63 11.81 88.89 12.22
Ministry of Petroleum and Natural Gas 182.65 7.60 187.97 3.56 143.05 4.13 171.49 4.32
Ministry of Power 116.44 14.90 161.54 15.35 292.02 21.73 175.63 17.46

In each of the three cases, the proportion of total outstanding trade payable to the value procured by the CPSEs during the study period is much higher for non-MSMEs than MSMEs. In the case of the Ministry of Petroleum and Natural Gas and the Ministry of Steel, the proportion of outstanding trade payable to non-MSME vendors exceeds 100% of the value procured, on an aggregate basis across the three years. Compared to non-MSME vendors, this proportion is significantly lower for MSME vendors (the highest being 21%).

Findings: Delayed payments by CPSEs to MSME suppliers

The final leg of our measurement involves estimating the 'delayed payments' by CPSEs to MSMEs, that is, payments delayed beyond 45 days from their due date. We aggregate the delayed payments outstanding as at year-end, by CPSEs to MSMEs, government department wise. Table 4 shows the delayed payments as a percentage of their annual procurement value from MSMEs.

Table 4: Delayed payments as percentage of procurement

2017-18 2018-19 2019-20 Average

Department of Chemicals and Petrochemicals 6.22 11.73 11.84 10.46
Department of Commerce 0.86 47.38 1.08 17.47
Department of Defense Production 5.82 3.35 5.44 4.78
Department of Fertilizers 7.58 5.25 4.82 5.38
Department of Heavy Industry 7.91 15.92 12.11 12.37
Department of Telecommunications 0 0 0 0
Ministry of Coal 9.11 5.42 8.47 7.19
Ministry of Defense 3.55 3.20 3.98 3.56
Ministry of Housing and Urban Affairs 6.72 4.86 5.49 5.70
Ministry of Mines 2.79 1.51 2.85 2.37
Ministry of Petroleum and Natural Gas 4.12 4.80 6.18 5.25
Ministry of Power 24.95 25.33 31.87 27.51
Ministry of Railways 11.03 20.58 11.02 13.62
Ministry of Science and Technology 0 0 0 0
Ministry of Shipping 14.36 3.47 2.94 5.62
Ministry of Steel 4.84 10.18 4.81 6.18
Ministry of Tourism 0 0 21.13 21.13

Total 7.36 8.06 8.70 8.16

We find that the delayed payments by CPSEs to MSMEs average at about 8% of the actual value of goods, services and works procured by them from MSMEs during the study period. This percentage has marginally increased from 2017-2018, and is higher than the average in 2019-20.


In this article, we take a sector-agnostic approach to measure the scale of the payment delays problem in public procurement in India. An analysis of the annual returns and balance sheets of CPSEs gives us new insights on the scale of the problem at three levels, namely, at the level of the CPSE, the industry and the government department to which the CPSE is aligned.

Our analysis provides evidence of the popular perception of CPSEs' weak payment discipline to vendors. Taken as a percentage of the average procurement undertaken by CPSEs, the payment delays by CPSEs to their vendors far exceeds their procurement values. Second, while CPSEs demonstrate weak payment discipline to both MSME and non-MSME vendors, the delay seems to be much larger towards large vendors than the small ones. Third, the delayed payments reporting requirements mandated under the MSME Act provides us an illustrative picture on the payment discipline of the CPSEs. For two out of three years of our study period, we notice that the total delayed payments to MSMEs is higher than the three-years average (Rs. 2323.42 crores).

Our approach of understanding payment delays in public procurement in India, through balance sheets of CPSEs demonstrates the possibility of setting up ongoing systems for the measurement of payment discipline of government departments through CPSEs aligned to them. Further, these delays may be indicative of either of liquidity mismatches or solvency issues, at the CPSE, or a mix of both. By approaching this problem from a balance sheet perspective, our study lays the foundation for conducting future work on the possible relationship between the financial health of the procurers and their payment discipline.

The authors are researchers at the CMI-Finance Research Group and thank Susan Thomas for valuable discussions.

Friday, February 26, 2021

Grievance Redress in the Financial Sector in India: Lessons from the field

by Renuka Sane, Srishti Sharma and Karthik Suresh.

The Reserve Bank of India (RBI) recently announced measures to strengthen its grievance redress (or consumer complaints) system. This is a timely announcement as banks have not been performing well on customer service. There has also been an increase in the number of complaints on digital transactions. The National Strategy for Financial inclusion has also said that improved grievance redress would enable wider access to finance.

While research on financial inclusion and consumer protection in India has evolved in the last decade, studies specific to consumer complaints are more recent (Siddique and Tripathi, 2010; Balasubramaniam, Biswas, Sane and Sarah, 2020; Raghavan, 2020; Dvara Research and Khabar Lahariya, 2020). An understanding of the nature and extent of the problems in accessing existing systems is an important input to policy.

In this article, we present our findings from the group interviews we conducted with diverse customers in rural and urban Maharashtra. We present our learnings on the products customers use, the problems they have when using the products, and how they deal with the problems. We also study experiences in accessing formal grievance redress mechanisms (GRMs). These interviews have important lessons on the differences in the approach between rural and urban customers. This can be a useful input in making the GRMs more inclusive.


We conducted 12 group interviews in the months of January and February 2020 with a total of 120 participants in Nagpur and Wardha districts, and Mumbai. Participants in the groups varied in economic conditions and usage of financial products. The groups were as follows:

  1. Nagpur and Wardha: The respondents belonged to eight villages in Nagpur and Wardha districts. These were women who were customers of Microfinance Institutions (MFI). Their occupations ranged from agriculture, dairy, animal husbandry and wage labour.

  2. Mumbai: We interviewed four groups in Mumbai: members of a self-help group of women who live in slums, media professionals, post-graduate students from a premier educational institution, and retired men who were members of the committee for their co-operative housing society.

Details regarding the groups we interviewed are provided in Table 1.

Table 1: Description of group interviews
Location Number of interviews Group description No. of participants Gender Age group Smart Phone Usage
Nagpur 8 Microfinance customers 80 All women 30-50 5
Mumbai 1 Self Help Group 14 All women 30-50 All
Mumbai 1 Post-grad students 10 80% men 20-25 All
Mumbai 1 Committee members of a cooperative housing society 5 All men 55-65 All
Mumbai 1 Media professionals 6 All men 30-40 All

Group Interviews

A typical session lasted about 20-25 minutes. After general introductions, our conversation revolved around the following questions:

  1. What kind of financial products did they use? Did they use banking services, credit, insurance, pensions, equity products, payment wallets etc.
  2. Had they heard of regulators such as the RBI, or the Insurance Regulatory and Development Authority of India (IRDAI)? Had they heard of formal mechanisms of grievance redress such as the system of Ombudsman set up by the regulators?
  3. Did they face any problems when using these products? If yes, what kind of problems did they face?
  4. What did they do when faced with such problems? Did they complain? If yes, to whom? What happened after they lodged their complaints?
  5. If they did not complain, why did they not complain?
  6. What kind of improvements would they like to see in the complaints mechanism?

Sometimes, it is possible that consumers do not remember incidents that may have happened, or do not see certain incidents as "problems". We therefore used hypothetical scenarios of aggrieved customers. For each financial product, we designed 3-4 scenarios each of which showed a different type of grievance. Each scenario was also placed at a different level of escalation within the system. Table 2 shows the set of scenarios for banking services. For instance, in the first case the problem had just happened and no action had been taken. In the second instance, the customer had complained to the provider, but had not received a reply. In the third, the customer had complained to the regulator who ruled against the customer. After presenting the scenarios, we first asked participants whether they have faced similar situations in the past. We also asked them what they would have done if they would have been in the situation as described in the scenarios. This helps us explore how consumers would react to different situations.

Table 2: Examples of hypothetical case studies: Banking
Scenario 1
Raj found that an ATM withdrawal transaction has been debited
twice in his passbook.
Scenario 2
The cashier at a bank talked rudely to Seema, who had politely
requested him to work faster as he was gossiping and functioning
slowly. The manager refused to intervene even after Seema had complained.
Scenario 3
The bank increased the interest rate by 3% on a home loan taken
by Rahul, saying it has the right to change interest rates whenever it
wishes. He complained to the Ombudsman, which agreed with the bank.


  1. Access to financial instruments : We asked all the participants whether they used the following financial services: banking, insurance, payment apps, pensions and securities. Figure 1 shows the variation in access to these instruments among the rural and urban samples. The rural sample had access only to banking services, microfinance loans and micro-insurance products. Very few among the rural sample used an ATM card, and even fewer had heard of payment apps. Considering that most of the women did not own a smart phone, there was no usage of mobile phones for financial transactions. They met their MFI representative and visited their bank branch about once a month. The urban sample had access to all the products. Everyone had a bank account. In the overall pool of 120 participants, only 4 participants used pension products. Hence this article does not include information on the usage of pensions.

  2. Figure 1: Access to financial instruments
  3. Awareness of GRMs: We listed the the names of various regulators and redress mechanisms and enquired if participants had heard of them. Among rural participants, no one had heard about the regulators or knew about the existence of GRMs and ombudsman. When we presented the hypothetical scenarios, their response was to go to the service provider from whom they had purchased the product. If this failed, they would approach the police or a government official like district magistrate or tehsildar. There was no awareness about existing formal grievance redress mechanisms among the rural sample. Most of the urban participants had heard about the regulators but only a few knew about the grievance redress mechanisms.

  4. Nature of grievances: The rural and urban sample differed in their perception of what constitutes a problem. The rural sample, for example, had internalised the rudeness of the staff. Misbehaviour, inconvenience (e.g. going to the bank branch to withdraw cash because the ATM card doesn't work) etc. were not seen as major problems. Everyone in the rural sample first reported they had never faced a problem with their bank or MFI. But when we shared the scenarios described earlier, two women said that they had faced such problems in the past. The grievances were mostly related to difficulty in opening bank accounts, ATM card getting stuck in the machine and an increase in interest rates. In the urban sample, the nature of grievances ranged from wrong debit transactions, mis-selling of insurance products, rude behaviour, delays in service delivery and concerns for data privacy (See Table 3).

  5. Response to the grievances: In the rural groups, women had not taken any action to seek redress. In one instance, a woman in Wardha district shared that her ATM card got stuck in the machine while she was withdrawing cash. Instead of approaching the officer at the branch, she stopped using the ATM card altogether and now visits the bank branch every time she wishes to withdraw cash. Some of the participants in the urban groups who had a grievance had approached the bank/insurance company and the regulator. In some cases, the threat of going to the regulator drives the service provider to resolve the complaint immediately. For example, a respondent in Mumbai told us that he had informed the branch manager that he has written to the RBI Ombudsman since a complaint had not been resolved within a reasonable time-frame. The branch manager ensured that his complaint was addressed on priority basis. Table 3 provides a description of the nature of grievance, as well as the response of the participant.

  6. Table 3: Nature, responses and outcomes of grievances
    Grievance Response Outcome
    ATM card got stuck Stopped using ATM card Goes to branch
    Rude behaviour, refusal to entertain the complaint No action
    Threat to increase interest rates No action
    Charge higher rate of interest than what was informed No action
    Painful recovery process No action
    Opening bank account Approached Tehsildar after six months Changed the provider
    Sharing data with third party vendors Online complaint to bank Stopped getting unsolicited communication calls
    Refusal to make cheque/DD Letter to Ombudsman Manager apologised and issued cheque
    Lack of cooperation by bank staff Met the branch manager Issue resolved
    Delays in EPF payment Letter to Ombudsman Matter out of jurisdiction
    Mis-selling of policy Contacted branch office No satisfactory response
  7. Reasons for not complaining: Fear of retribution was one of the major reasons for not complaining about grievances, especially among the rural sample. These participants were afraid that if they try to take any action, they might face an adverse action from the service provider e.g. difficulties in getting a loan. One of the respondents from Nagpur district told us, "when the bank staff speak to us rudely, we just let it go. We did not want to create an issue with the bank manager." Further, they felt that even if they complain, nobody will listen to them. Among urban professionals, the most common reasons for not complaining were lack of trust in the system, complexity of procedures and the time consumed by these procedures. For instance, one student shared that his parents were mis-sold an insurance policy, however they did not file any complaint citing that their problem was unlikely to be resolved. Some participants also reported that they did not consider their problem to be big enough to undertake the effort to complain.

Implications for the design of GRMs

The Indian Customer Satisfaction Index (ICSI) study showed that Indian banks have customer loyalty score of 65 compared to Singapore (74), US (72), South Africa (71) and UK (67). Yet, only a small fraction of consumers file complaints with the regulators in banking, insurance and pensions sectors. Indians operate 574 million basic savings bank accounts however for FY2019, the RBI Ombudsmen across 21 offices in India received only 1,95,901 complaints in FY2019 i.e. 0.34 complaints per thousand accounts. With life insurance products, this figure for FY19 stands at 0.59 complaints per thousand policies sold. For comparison, the corresponding figure for the Financial Ombudsman Service (FOS) in the United Kingdom (UK) is 2.3 complaints per thousand accounts during the same period. Our study sheds light on some of the reasons for the low rates of complaints despite the high level of dissatisfaction.

  1. Perceived cost of inconvenience: We found that the perceived cost of inconvenience or bad behaviour is very low for the rural and urban poor samples. Those who faced such problems either took no action or stopped using the product. Only when there was some kind of monetary loss, consumers took some action. The cost of inconvenience is compounded for women who have recently become a part of the formal financial sector and gotten access to microfinance loans. For instance, one woman who took a microfinance loan shared that a recovery agent stayed at her home for 12 hours and refused to leave without the money. She did not file a complaint because she perceived her inconvenience to be lower than the threat of losing access to the product.

  2. Low levels of awareness: Awareness about the grievance redress mechanisms in both rural and urban samples is low. Lack of awareness increases the cost of complaining. The problem is further exacerbated by the fact that spreading awareness of existing processes to seek redress is not high on the agenda of financial service providers.

  3. Fear of retribution and perceived right to redress : The low levels of engagement with GRM in the rural sample is driven by the fear of retribution. We also saw that the propensity to complain within this group depended on their perceived right to redress. They felt that redress is a luxury for them and not a right.

  4. Costs of complaining: Among the group that has an awareness of GRMs, and an awareness of their rights with limited fear of retribution, the costs of the process were seen to be very high. For instance, due to delays in processing cheques by the bank, one respondent, a middle aged professional from Mumbai, could not obtain a favourable rate of interest for his provident fund payment. He approached the ombudsman to complain regarding the loss he incurred due to the lower interest rate. However the ombudsman responded by stating that the matter was outside their jurisdiction. Confused with which provider to approach, he did not pursue the matter further.

Our results suggest that there are deficiencies in the existing GRM process, and consumers are responding to their dissatisfaction either by bearing with the problem, changing their behaviour to avoid confrontation with the system, or stopping the use of the financial product entirely. These seem to be the preferred modes of adjustment relative to formally complaining.

Spreading awareness about the rights of consumers, and the formal grievance redress mechanisms should be a vital element of any good GRM design. Information should be imparted on types of legitimate grievances for which a customer can seek redress. Such an effort would help mitigate consumers' fear of retribution associated with the task of complaining. The onus of spreading awareness on rights to redress and redress mechanisms should be put on financial service providers. The providers should not only impart knowledge on existence of such mechanisms but also explain the methods to access these systems and to escalate their complaint in case of unsatisfactory resolution. Moreover, there is a need for simplification of grievance redress process, especially in the cases where two or more financial products are involved and jurisdictions of various regulators are unclear. Such measures would reduce the cost of complaining and improve trust among the consumers about the system.


Financial inclusion is one of the major policy goals for the Indian government. Aided by various government schemes like the Pradhan Mantri Jan Dhan Yojana, 357 million new savings bank accounts with insurance coverage have been opened since March 2014. The number of National Pension Trust subscribers has doubled from 6.5 million in FY2014 to 13.9 million in FY2020 and the number of demat accounts of Indian residents registered with the National Securities Depositories Ltd. (NSDL) has increased from 13.4 million in FY2014 to 19.1 million in FY2020. However, to sustain financial inclusion, an effective customer grievance redress mechanism (GRM) is important. The group interviews helped us understand the nature and extent of complaints, the reasons that consumers chose to complaint or not and the experiences consumers had while engaging with the GRM. We hope that the lessons from such studies can provide valuable insights to regulators as they take steps towards improving existing grievance redress mechanisms.


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Raghavan (2020), Transaction Failure Rates in the Aadhaar Enabled Payment System: Urgent Issues for Consideration and Proposed Solutions, 21 May 2020.

Siddiqui and Tripathi (2010), An analytical study of complaining attitudes: With reference to the banking sector, Journal of Targeting, Measurement and Analysis for Marketing, Vol. 18, p. 119-137.

The authors are researchers at NIPFP. We thank Sudipto Banerjee and Sarang Moharir for participating in the Mumbai interviews. We thank Vimal Balasubramaniam for useful comments.