Leader in tech, laggard in succession systems

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My friend Bhaskar, a Canadian of Indian origin, is the deputy head of a provincial banking regulator in that country. He worked as a banker in India in the nineties before migrating. Bhaskar was marvelling at the ease, the scale and low costs at which monetary transactions happen using the UPI (Unified Payments Interface).

I also briefed him about India’s unique account aggregator ecosystem and its huge impact on delivering loans to small businesses and individuals at unmatched speed and convenience. (Disclosure: I am governing council member designate of Sahamati, which drives open banking using the account aggregator system).

Our banking system is the global leader in the use of technology. Personal finance expert and author Monika Halan’s description of the otherwise advanced economies as “Digitally Less Developed Countries” appears apt.

Yet banking customers in India continue to face issues. One is the pain and harassment that families go through while claiming the amount in a deceased person’s account. It is difficult to reconcile the ultra-modern, technology-driven, banking sector with its poor record on consumer service, including on the succession front.

In 1983, the banking system pioneered the uniquely Indian “nominee system” to allow speedy transfer of money to the nominee on the account holder’s death. Over time, its implementation has given rise to many difficulties that require remedial action.

The white paper Reimagining Nominations — Making Succession Smoother and Simpler written by Pramod Rao (in his personal capacity before his current position as executive director at the Securities and Exchange Board of India) with inputs from the Association of Registered Investment Advisors (ARIA) has highlighted the measures that need to be implemented.

Some of these measures require fresh regulations but some just require consistent implementation of existing regulations. A few examples are highlighted here.

In a joint fixed deposit (FD) held on “either or survivor” basis, the joint holder has the right to get the FD proceeds on the death of the other holder. But there was no clarity on whether the surviving holder could prematurely withdraw money from the FD on the other holder’s death or had to wait until maturity. The Reserve Bank of India (RBI) issued instructions on August 16, 2012, asking banks to make sure the survivor would be able to withdraw the FD prematurely. But as this article by Rajat Dutta () points out, harassment continues even a decade after the RBI issued instructions.

To cite another example, banks require two witnesses to sign a nomination form despite the RBI having clarified that witnesses are required only if the account holder has affixed a thumb print. This directive is widely flouted leading to harassment, and worse, no nomination in some cases.

In some areas, the RBI’s rules are confusing. The regulations on nominating a minor don’t make it compulsory to provide details of the minor’s guardian, but the nomination forms ask for it. Take the example of a couple having a joint account that wants to nominate their minor child but is not able to decide on a guardian, and hence doesn’t do the nomination. They are not worried about the non-nomination as the survivor gets the money in the event of expiry of the other holder. They resolve to nominate the child as soon as she becomes a major.

Time passes, the child becomes a major, but the nomination is forgotten by then. The parents pass away simultaneously or in quick succession. Their child suffers due to the absence of nomination — all because of a confusing nomination form.

Then there are areas like allowing more than one nominee in a bank account, allowing nominees to inherit beneficially rather than as a trustee for the legal heirs that will require changes in the banking law itself. The regulator is reportedly working on this.

Truth be told, the RBI has been responsive to making changes in its regulations to meet changing needs. It should hasten to act on amending the regulations that it can and recommend changes in the law where needed.

It must also ensure implementation of its regulations by imposing exemplary fines on the worst offenders. Only then will our antiquated succession system begin to match our ultra-modern technology systems.

The writer heads Fee-Only Investment Advisors LLP,
a Sebi-registered investment advisor
Twitter: @harshroongta

(A slightly different version of this column first appeared in the Business Standard on January 16, 2023)

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