## Wednesday, December 28, 2022

### Examining grievances and redress for banking products

by Vimal Balasubramaniam, Aishwarya Gawali, Renuka Sane and Srishti Sharma.

Banks are witnessing persistent consumer complaints. These range from high service charges, lack of transparency in pricing and mis-selling. The regulatory system is currently not designed to capture the total number as well as nature of grievances. Without this information, it becomes difficult to design a policy solution.

We examine the grievance and redress experience for a heterogeneous set of consumers, with a large scale survey in five major states of India. Through this survey, we map the journey of a consumer's experience-- from usage and grievance to resolution. We also study the impact that a grievance has on subsequent usage of the product. In this article, we present information on the consumer's experience for a comprehensive set of banking and payment products that fall under the regulatory ambit of the Reserve Bank of India. These include:

1. Banking deposits.
2. Bank credit.
3. ATM/Debit Cards.
4. Net banking/ Phone Banking(including NEFT/IMPS/RTGS).
5. NBFC.
6. UPI Wallets.
7. Microfinance institutions.
8. Co-operative credit societies.

The evidence from our study can form the basis of a more responsive system of grievance redress for retail consumers.

### The survey design

Our survey was conducted in Maharashtra, Bihar, Haryana, Madhya Pradesh and Andhra Pradesh. We used a multi-stage stratified sampling method to draw the sample of households. The Primary Sampling Units (PSUs) were the villages for rural areas and census enumeration blocks (CEBs) for urban areas. The Ultimate Sampling Units (USUs) were the households from these PSUs.

The 2011 Census served as the sampling frame for the identification of the districts within each state. All the districts in a state were divided into terciles on the basis of distribution of households using banking deposits, curated from the RBI data across four quarters of 2020-21. To ensure proportionate distribution in each tercile, two districts were picked from each tercile using systematic random sampling. This exercise was repeated for each of the five states. In states such as Maharashtra, Bihar & Haryana where one district held a substantially high proportion of deposits, it was treated as two districts and over sampled to account for the large proportion of deposits. Accordingly, we got a sample of six districts each from Madhya Pradesh and Andhra Pradesh, and five districts each from Maharashtra, Bihar and Haryana which gave us a total of 27 districts.

Within the district, the allocation of the sample between villages and CEBs was proportional to the rural-urban distribution of the population. Villages in a district were stratified on the basis of distance from district headquarters and CEBs were stratified on the basis of share of CEB in the district's urban population. Three strata were created on the basis of the above mentioned criteria, for both villages and CEBs. The number of households from each strata was selected in proportion with the population share of each strata. So if one village strata has 40% of the rural population, then 40% of the rural sample of the district came from that strata.

We collected information on the demographics, physical and financial assets, and liabilities of the household. The core module of the questionnaire focused on experience of consumers with grievances & redress regarding financial products. The total sample size was 21,355 respondents.

### Measuring grievances in the banking system

According to the current grievance redress system for banks, NBFCs and Prepaid Payment Instruments, consumers must first lodge a complaint with their service provider. If the service provider is unable to provide resolution in a satisfactory manner in 30 days, the consumer may escalate the complaint to the Ombudsman. The Ombudsmen for banks, NBFCs and digital payments have been harmonised under the Integrated Ombudsman Scheme in 2021. Consumers can lodge their complaints with the Ombudsman using the Complaint Management System (CMS) portal or by using a complaint form. We asked the following questions to understand the consumer's experience at each step of the grievance redress process:

• First we asked if the respondent is using/has ever used the mentioned product. This ensures that we also capture past users of a financial product.
• We asked if they have faced an issue with the mentioned financial product in the last 12 months. This helps us capture the grievances faced by consumers.
• We then asked the respondent what their latest/most recent issue was for the mentioned financial product.
• We also asked them their first course of action after encountering the grievance. Through this question, we understand how many people complain after facing a grievance. We consider that a respondent has complained if they went to the service provider or regulator with their issue. We do not include complaints to the police or consumer courts as this is not in the ambit of the regulatory grievance redress system.
• Additionally, we asked if their issue was resolved after their first complaint.
• For those who did not receive resolution at this stage, we asked if they escalated the complaint to a higher authority.
• For those who escalated their complaint, we asked if they finally received resolution.
• To all those who faced a grievance, we asked what the impact of the grievance was, on their usage of the product.

### Overview of grievances in the banking system

In Table 1, we describe the extent of usage and grievance for the various banking and payment products. Columns (1) and (2) provide the number and percentage of the sample who have used a particular financial product. Columns (3) and (4) describe the number and proportion of users that reported that they faced an issue/grievance related to the financial product in the last 12 months.

Table 1: Usage and incidence of grievance
Product Usage Incidence of grievance
(1) (2) (3) (4)
N % N %
Banking deposits 17407 81.51 2112 12.13
ATM/Debit Card 8625 40.39 1279 14.83
Netbanking (IMPS/NEFT/RTGS) 3161 14.80 503 15.91
UPI Wallets 2825 13.23 531 18.80
Bank credit 1640 7.68 242 14.76
MFI 961 4.50 104 10.82
NBFC 448 2.10 82 18.30
Cooperative credit society 386 1.81 72 18.65

Banking deposits were the most used product, followed by ATM/Debit cards. Netbanking was the third most used product, followed closely by UPI wallets. All the others were used by less than 10% of the sample each. Co-operative credit societies had the smallest share of users.

The incidence of grievance ranged between 10% to 19%. Even though bank deposits were the most used product, they had the second lowest incidence of grievances. The highest grievance rate was for UPI wallets, at about 19%. Co-operative credit societies had the second highest incidence of grievances, even though the usage of these products was the lowest in our sample. The same is true for NBFCs as well - only 2% of the sample used NBFC products, but 18% of these had faced a grievance.

### Nature of grievance

In Table 2, we describe the nature of grievances faced by consumers. We select the top 3 grievances for each product and present the number and proportion of consumers who faced the given issue.

For banking deposits, 28% of those with a grievance had an issue related to transaction failure. 26% of the issues were related to charges being deducted without information. More worryingly, 12% of the issues were related to difficulties with opening a bank account. This has implications for financial inclusion as such issues may dissuade people from participating in the formal financial system.

 Product N % Banking deposits Failures or delays in transactions 585 28 Deductions or charges without information 555 26 Difficulty in opening bank account 244 12 Bank credit Loan/interest rates 130 54 Fraud, hidden charges etc 102 42 Other, specify 10 4 ATM/Debit card Lack of cash in ATM 490 38 ATM closed/non functional 259 20 Server down 156 12 Netbanking Server down 204 44 Delays in services 92 20 Money deducted but transaction failed 85 18 UPI Wallets Server down 188 35 Delays/Failure of transactions 115 22 Transaction failed, but money debited 99 19 NBFC Complex terms and conditions/no adequate notice 36 44 Non transparency in contract/ loan 23 28 No communication about loan sanctioned 7 9 MFI Charged higher interest rate than informed 56 54 Threat to increase interest rates 27 26 Painful recovery process 12 12 Co-operative credit society Charged higher interest rate than informed 42 58 Threat to increase interest rates 23 32 Painful recovery process 6 8

For bank credit, the dominant issues were interest rate related, however, 42% of consumers reported having faced fraud which is a far more serious nature of grievance.

For ATM cards, 38% of the issues are related to lack of cash in ATMs, 20% were related to dysfunctional ATMs and 12% of the issues came up because the server was down. 44% of netbanking issues were also because the server was down. While transaction, server and service infrastructure related issues dominate in case of payment products such as UPI and net banking, interest rate and loan contract related issues are significant for credit products.

### From grievance to complaints and resolution

In Table 3, we report the number of people who complained to either the service provider or regulator when faced with the grievance. Column 2 presents the total number of grievances for the given product. In Column 3, we report the number of users who complained to either their service provider or regulator. In Column 4, we report the number of consumers whose complaint was resolved at the first stage itself. In column 5, we report how many of those who escalated their complaint reported that their issue was resolved.

 (1) (2) (3) (4) (5) Product Had a grievance Complained to FSP Resolved by FSP Escalated to higher authority Resolved upon escalation Banking deposits 2112 1064 661 88 47 Bank credit 242 201 104 61 6 ATM/Debit Card 1279 521 410 39 22 Netbanking(IMPS/ NEFT/RTGS) 503 252 180 24 13 NBFC 82 72 43 8 4 UPI Wallets 531 187 141 9 6 MFI 104 69 34 8 4 Cooperative credit society 72 64 37 7 5

Out of the 2112 consumers who faced a grievance regarding banking deposits, 1064 (50%) complained, which is how we define the complaint rate. Of these, 661 (62%) reported that their problem was resolved after their first complaint, which is how we define the resolution rate. This suggests that 403 users' complaints were not resolved in the first instance. Of these, only 88 (21%) escalated the complaint. Of these 88, 47 (53%) reported that their problem was resolved after escalation. The other half of the complaints that were escalated remain unresolved.

Banking deposits have the highest number of complaints. However, co-operative credit societies had the highest complaint rate at 88% followed by NBFCs at 87%. ATM card complaints have the highest rate of resolution at the first stage -- 410 out of 521 complaints (78%) got resolved at the first stage. This is followed by UPI wallets at 75% and netbanking at 71%. High resolution rates suggest that grievance redress at the first point of contact, which is usually the Financial Service Providers (FSPs) is performing efficiently. MFIs have the lowest resolution rate (49%) at the first stage, and points to the deficiencies in the redress system.

### Reasons for not complaining

In the previous section we examined what happens to the complaints that enter the official grievance redress system. However, it is evident that not all grievances turn into complaints. What about the users who do not lodge a complaint?Table 4 shows the reasons why people do not complain when faced with a grievance. The rows show the number of users who did not complain for the reason given in the column.

For banking deposits, the main reason for not complaining was that users did not know the process of grievance redress. 38% of those who did not complain, did so because they did not know the process. For bank credit, the costly and complex nature of the process was the main reason for not complaining with 34% users not complaining due to this reason. 36% ATM/debit card users who did not complain did so due to the complicated and expensive nature of the grievance redress process. 26% did not complain because they did not know the redress process. Another 15% did so because they were not sure about whether their problems would be resolved. For netbanking and phone banking, 33% users did not complain because the redress process is too costly and complex, 15% did not complain because they were not sure about their issue being resolved and 17% because they didn't know the process.

 Product Did not complain to FSP Costly and complex process Did not know validity of complaint Do not know/wish to answer Fear of retribution Resolution unlikely Unknown process Was advised not to by friends family Banking deposits 1048 177 88 96 38 188 408 19 Bank credit 41 14 6 - 2 6 5 2 ATM/Debit card 758 278 71 31 17 120 198 17 Netbanking 251 85 25 18 7 43 39 12 UPI wallets 344 114 41 9 5 60 94 15 NBFC 10 1 - - 2 2 2 - MFI 35 - 1 3 2 8 19 - Co-operative credit society 8 - - 1 1 2 -

In the case of UPI wallets, the expensive nature of the process, lack of information about redress procedures and the prospect of resolution being unlikely, were the main reasons for not complaining. For NBFCs, 20% of users who did not complain, did so because of the fear of retribution, another 20% did not complain because they were not sure about whether their problems would be resolved. Finally, 20% did not complain because they did not know the process. For MFIs, 54% of users did not complain because they were unaware of the process and for co-operative credit societies, this number was 25%.

### Impact of grievance on usage

The experience of having faced a grievance is bound to have some impact on the consumer's usage of the product. In Table 3, we present the number and proportion of people who either changed their provider, reduced usage of the product or stopped using the product after facing a grievance. These actions indicate that the grievance had an adverse impact on the user. Grievances related to deposit or payment products lead about 30% of consumers to take some action. The response by consumers is higher for credit related products.

Table 4: Changed provider/reduced/stopped usage
Product Had a grievance Took action
(1) (2) (3) (4)
N N %
Co-operative credit society 72 63 88
NBFC 82 65 80
MFI 104 65 62
Bank credit 242 129 52
Netbanking 503 166 34
UPI Wallets 531 173 31
Banking deposits 2112 666 31
ATM/Debit card 1279 388 29

In the case of co-operative societies, 88% of those who faced a grievance either changed their provider or reduced or stopped using the product as a result of it. This indicates the co- operative society members who faced a grievance may not have had a satisfactory experience with the grievance redress process. This number stands at 80% for NBFCs and at 62% for MFIs. The impact of grievances for non-bank lending institutions is far more adverse than for any of the other products.

### Conclusion

Improving outcomes for consumers is one of the core goals of finance. It is important to understand how the system deals with grievances of consumers, and where there is scope for improvement. Our results present a heterogenous picture. We find that the usage of deposit and payment products is higher than credit products, while the grievances are higher for credit products. Deposits are the most used product but have an incidence of grievance of 12%. Co-operative societies are used by less than 2% of the sample, yet almost 19% of its users have faced a grievance. NBFCs are used by just about 2% of the sample, and have an incidence of grievance of 18%. Deposit and payment related services are able to resolve grievances faster - more than 70% of the complaints were resolved in the first instance. This is not true of credit related products - for example, only 49% of the complaints were resolved for MFIs. Further research could explore the possible reasons for this heterogeneity.

Renuka Sane and Aishwarya Gawali are researchers at NIPFP. Vimal Balasubramaniam is a researcher at Queen Mary University, London. Srishti Sharma is a PhD student at Texas A&M University.

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