Unit 5: Relationship between bank and customer

The bank–customer relationship is a contractual bond that begins the moment an account is opened and governs every service rendered thereafter. It rests on both common-law principles and statutory obligations, and in the modern era is increasingly mediated by technology and competitive pressure.

• Legal foundation: Primarily a debtor–creditor relationship (bank owes the deposited money back on demand), overlaid with agency, trustee, and bailee roles depending on the service.
• Core duties of the bank: Honour cheques, maintain secrecy of accounts, give reasonable notice before closing, and render accurate statements.
• Core duties of the customer: Maintain the account in good faith, exercise care in drawing cheques, and comply with KYC norms.
• Governing environment: RBI directives, the Banking Regulation Act 1949, consumer-protection mechanisms, and anti-money-laundering statutes frame the relationship.
• Modern shift: From transaction-based to relationship-based banking, where retention and lifetime value matter more than one-off dealings.

II. Customer Acquisition and Market Positioning

How banks win and retain depositors in a crowded market.

A. Strategy for expanding customer base

A bank grows its base by widening reach, deepening segments, and lowering onboarding friction.

• Financial inclusion push: Opening no-frills/Basic Savings Bank Deposit Accounts and leveraging Jan Dhan Yojana to pull the unbanked into the formal system.
• Business correspondent model: Appointing local agents to deliver services in villages where branches are uneconomic.
• Cross-selling and bundling: Offering a savings account linked to insurance, cards, and loans to raise accounts-per-customer.
• Digital onboarding: Video-KYC and Aadhaar e-KYC cut account-opening time from days to minutes, widening the funnel.
• Referral and salary accounts: Tie-ups with employers to capture entire payrolls in one acquisition.

B. Services to different customer groups

Banks segment customers and tailor product suites to each group's needs.

• Retail/individual: Savings and recurring deposits, personal loans, debit cards, retail internet banking.
• High-net-worth individuals (HNI): Private banking, wealth management, priority service desks, higher transaction limits.
• Corporate and SME: Working-capital finance, cash-management services, trade finance, letters of credit.
• Agricultural: Kisan Credit Card, crop loans, subsidised interest schemes.
• NRI: NRE/NRO/FCNR accounts with specific repatriation and tax treatment.

C. Competition amongst banks for customers

Deregulation and new entrants have turned deposits and lending into a buyer's market.

1. Price competition: Higher savings-interest rates (post-2011 deregulation), lower loan spreads, and waived charges to attract switchers.
2. Non-price competition: Service quality, branch and ATM density, app experience, and brand trust.
   • New entrants: Payments banks, small finance banks, and fintechs intensify rivalry, especially in payments and micro-lending.
   • Switching enablers: Account portability expectations and UPI interoperability reduce the stickiness that once protected incumbents.

III. Customer Relationship Management (CRM)

Using data and systems to maximise customer lifetime value.

A. Customer relationship management

CRM is the systematic management of all customer interactions to improve retention, satisfaction, and profitability.

• Operational CRM: Front-office automation — contact centres, lead tracking, and sales-force tools that log every touchpoint.
• Analytical CRM: Mining transaction data to score propensity, predict churn, and identify cross-sell opportunities.
• Collaborative CRM: Sharing a single customer view across branches, call centres, and digital channels so service is consistent.
• Lifetime-value focus: Retaining an existing customer costs far less than acquiring a new one, so CRM prioritises loyalty programmes and proactive service.
• Segmentation output: Classifying customers (e.g., mass, affluent, HNI) to allocate relationship managers and service tiers.

IV. Grievance Redressal and Consumer Protection

The two-tier machinery for resolving customer complaints.

A. Complaint management system

An internal mechanism through which a bank receives, tracks, and resolves customer grievances within defined timelines.

• Internal ombudsman: Banks must appoint one to review complaints rejected or partly resolved by the bank before escalation.
• Channels: Branch complaint registers, toll-free numbers, email, and online grievance portals with ticket numbers for tracking.
• Turnaround norms: Acknowledgement and resolution within stipulated days; unresolved complaints auto-escalate.
• Root-cause analysis: Logged complaints feed back into process improvement, closing the loop with CRM.

B. Banking ombudsman scheme

A free, quasi-judicial grievance-redress forum created by RBI under the Banking Regulation Act for customers whose complaints the bank has not resolved.

• Escalation condition: Approach the ombudsman only after a written complaint to the bank is rejected or unanswered for 30 days.
• Scope: Deficiencies such as non-payment of cheques, delayed remittances, non-adherence to fair-practice codes, and ATM/card disputes.
• Integrated scheme (2021): RBI merged earlier schemes into one Integrated Ombudsman Scheme with a "One Nation, One Ombudsman" approach and a central receipt-and-processing centre.
• Remedy: The ombudsman can pass an Award directing compensation; the service is free to the complainant.
• Appeal: Lies with the Appellate Authority (a Deputy Governor of RBI).

V. Prevention of Money Laundering Act (PMLA), 2002

The statutory backbone of anti-money-laundering compliance in banking.

A. Prevention of money laundering act (PMLA), 2002

PMLA criminalises converting proceeds of crime into legitimate assets and obliges banks to detect and report suspicious activity.

• Objective: Prevent money laundering, confiscate property derived from laundering, and punish offenders.
• Enforcement: The Enforcement Directorate (ED) investigates; the Financial Intelligence Unit–India (FIU-IND) receives reports.
• Obligations on banks:
  • KYC/CDD: Verify identity and beneficial ownership before and during the relationship.
  • Record-keeping: Retain transaction and identity records for the statutory period (currently five years).
  • Reporting: File Cash Transaction Reports (CTR) for cash above ₹10 lakh and Suspicious Transaction Reports (STR) regardless of amount.
• Consequences: Attachment and confiscation of property, rigorous imprisonment, and monetary penalties for both launderers and non-compliant institutions.

VI. Technology-Enabled Advisory and Decisioning

Automated systems that assist or replace human judgement in service delivery.

A. Chatbots & virtual assistants

Conversational AI programs that handle routine customer queries around the clock.

• Function: Balance enquiries, transaction history, card blocking, and FAQ handling via text or voice.
• Technology: Natural-language processing matches intent; rule engines or machine-learning models generate responses (e.g., SBI's "SIA", HDFC's "Eva").
• Benefit: Reduce call-centre load, give instant 24×7 service, and escalate complex issues to human agents.

B. Credit scoring models

Statistical models that quantify a borrower's creditworthiness as a single score.

• Inputs: Repayment history, outstanding debt, credit-mix, length of history, and new-credit enquiries.
• Bureau score: CIBIL score ranges from 300 to 900; a score above ~750 signals low default risk.
• Techniques: Logistic regression and increasingly machine-learning classifiers estimate probability of default.
• Use: Automates loan approval, prices interest to risk, and sets credit limits — speeding decisions and reducing subjectivity.

C. Robo-advisory

Algorithm-driven platforms that provide investment advice with minimal human intervention.

• Process: A risk-profiling questionnaire feeds an algorithm that proposes a diversified portfolio and rebalances it automatically.
• Advantage: Low fees and low minimum investment democratise wealth management beyond HNI clients.
• Limitation: Limited handling of complex, emotion-driven, or life-event financial planning that human advisers manage better.

VII. Digital Banking Channels

The self-service delivery infrastructure that now carries most transactions.

A. Internet banking

Web-based access to banking services from any connected device.

• Services: Fund transfers (NEFT, RTGS, IMPS), bill payments, statement download, and fixed-deposit creation.
• Security: Two-factor authentication, OTP, and encryption protect sessions against fraud.

B. Mobile banking apps

Smartphone applications delivering banking on the move.

• Features: App-based transfers, UPI integration, QR-code payments, cardless cash withdrawal, and biometric login.
• Edge over web: Push notifications, location services, and device-bound authentication improve both convenience and security.

C. ATMs and kiosks

Unattended machines extending branch functions beyond banking hours.

• ATM: Cash withdrawal, deposit, balance enquiry, mini-statement, and PIN change via a debit card.
• Kiosks/self-service terminals: Passbook printing, cheque deposit, and account opening — offloading routine work from counter staff.
• White-label ATMs: Operated by non-bank entities to deepen rural reach.

D. UPI and digital payments

A real-time payment system enabling instant inter-bank transfer through mobile devices.

• Mechanism: Unified Payments Interface, run by NPCI, links multiple bank accounts to a single app using a Virtual Payment Address (VPA).
• Authentication: A single mobile PIN authorises transfers; no bank-account details are shared with the payee.
• Instruments in the ecosystem: Debit/credit cards, mobile wallets, NEFT/RTGS/IMPS, and QR-code payments complement UPI.
• Impact: 24×7 interoperable, low-cost, near-instant settlement has driven India's shift toward a less-cash economy and sharply lowered the bank's per-transaction cost.