Why is it easy for banks in India to take the youth for costly and risky rides particularly in the context of increased demands for home loans with one-sided loan agreements? The answers should be obvious: Banks in India are still unregulated and a law unto themselves; the youth who account for half of India’s population are poorly informed about many things, particularly matters involving money and finance, and do not have the time and patience to know these things, caught as they are in the fast pace of life in a world of fast-paced globalization.
The manner in which banks hoodwink customers to take home loans while, at the same time, creating provisions to escape responsibility for the mortgaged properties by forcing borrowers to go for insurance keeping in line with the policies of the banks, failing which banks themselves take policies and debit the premiums to the borrowers’ loan accounts is an alarmingly exploitative trend without any legal basis.
The most appalling aspect is home loan insurance. As this seems egregious, I will give the Canara Bank home loan agreement policy here as an illustration. The bank forces borrowers to sign loan agreements across the table without giving them copies in advance; thereby not allowing them to take informed decisions. The bank’s arbitrariness is writ large in clause 21 of its agreement form, which is excerpted below:
“The borrower/s shall adequately insure the schedule property for the full market value against risk of fire, war, riots, civil commotion, strike, accident, risk and also such other purposes as may be prescribed by the law for the time being in force and as required by the Bank and keep the policy always current by duly and punctually paying the premia [sic!] from time to time and to assign the benefits in insurance policy thereof to the Bank. The Bank shall be entitled for all the benefits of all such policies.
The Borrower/s hereby agree/s and undertake/s to do everything to transfer and effectively vest in the Bank the benefits of all such policies. The Borrower/s further agree/s to indemnify the Bank against loss by reason of damage or destruction or loss to the schedule property from any cause whatsoever for reason of claim by third party in respect of the same.
The Bank is at liberty and is not bound to effect such insurance at the risk, responsibility and expenses of the Borrower/s with any Insurance Company only to the extent of the value of schedule property as estimated by the Bank and that in the event of insuring the schedule property, the Bank shall not be considered or deemed to be responsible or liable for non-admission or rejection of the claim wholly or in part whether the claim is made by the Bank or by the Borrower/s. It is expressly undertaken by the Borrower/s that he/she/they shall himself/herself/themselves of his/her/their own accord take all steps like initiation of filing claims/furnishing necessary information to the Bank/insurance Company without being informed of details of loss/damage for any reason whatsoever. In the event of rejection of claim either wholly or in part on account of loss/damage to the security, the Borrower/s shall be liable to repay to the Bank the entire outstanding liability without requiring the Bank to proceed in the first instance against the Insurance Company.”
The clause excerpted above refers to “prescribed by the law”. A law is a piece of legislation brought into force, in the case of nationalized banks only by Parliament; but there is no law enacted as mentioned in this clause. Though the insurance documents are in the bank’s custody, there is no commitment in the agreement form that the bank will claim the insurance amount. The clause is arbitrary, evasive, one-sided, vague and whimsical.
More often than not the bank has its own insurance tie-up, which the borrowers may not know. The borrowers are not even apprised of the need for insurance. Without even getting the borrower’s consent, the bank takes insurance cover on its own and debits the amount to the borrower’s loan account. In doing so, it does not care for the established norms.
In the Do’s and Don’ts for property insurance, the Insurance Regulatory and Development Authority of India has stated on its website:
Don’t allow anyone else to fill your proposal form; and no kind of loan should be bundled with other products, insurance policy is a separate product.
The website of United India Insurance Company has mentioned: Fill the proposal form yourself and give complete and factual information. False or misleading information could lead to disputes at the time of a claim. Do not sign a blank proposal form or leave any portion unanswered.
Having taken all legal safeguards from the borrower such as title deed mortgage, collateral guarantee, and undertaking by the employer, where is the legal provision to have additional protection to the mortgage with insurance taken by the bank at the borrower’s cost? If the bank has passed on the responsibility of insurance claim to the borrower, what is the need for it to take the insurance policy and keep it with them? When the policy taken is in the bank’s custody how will the borrower make an insurance claim? How can the bank take an insurance policy on the property mortgaged, without the form being filled up and signed by the borrower? These questions remain unaddressed.
The banking ombudsman set up by the RBI is ineffective, and its weight is on the side of the banks. Aggrieved bank customers hardly get any justice or have any effective grievance redress mechanism. The media has extensively reported this and also the home loan, insurance, and bundling rackets. Can the RBI governor rein in the erring and egregious banks, and live up to what he said a month ago: “My name is Raghuram Rajan and I do what I do“?