National Council of Applied Economic Research
Opinion: C.S. Mohapatra.
Policies have sought to promote participation in financial markets, but investor ignorance and negligence as well as fraudulent activities are impediments to growth.
India’s financial sector has grown exponentially over the past two decades. One major contributor to this is the rising participation of private investors in financial markets coupled with digitalisation. While the growth is commendable, it has brought new challenges that need to be addressed promptly. Policies and regulations have sought to promote increased participation in the sector, but instances of investor ignorance and negligence as well as fraudulent activities have acted as impediments to growth. Increasing complaints received by financial services institutions and regulators are evidence of the challenges posed by the adoption of fintech. The grievance redress mechanism often struggles to keep pace, leaving many consumers floundering in the wake of unresolved complaints and delays. A robust mechanism could potentially increase retail investment in the financial markets.
Financial regulators/institutions also face a challenge of disposal. Limited manpower and an increasing volume of complex cases impact consumer confidence and burden the institutions with increased operational costs and reputational risk. Systems like SCORES (SEBI Complaints Redress System) have pioneered online dispute resolution mechanisms, but consumer adoption remains low. A significant portion of the population either lacks access to necessary technology or the expertise to use digital tools. This not only elongates the resolution timeline but also discourages users from engaging with online platforms. The hesitation to file grievances also stems from a perceived complexity, fear of going unheard or getting lost in the procedural labyrinth. This phobia is worsened by the lack of user-friendly mechanisms that offer transparent and timely updates.
A major hurdle is the stark lack of financial literacy coupled with the gender gap in literacy. According to the OECD Report 2023, globally 35% men are financially literate compared to 30% of women. The financial literacy gender gap is even wider in developing economies. In India, 27% men are financially literate, but only 20% of women. This lack of financial literacy is not just about understanding basic financial principles but also extends to a lack of knowledge about the available system including for grievance redress. Thus, the solution lies not just in speedy and effective grievance redress but also digitalised financial literacy efforts as well as the adoption of a modern and preferably unified grievance redress agency. Creating a unified online portal for all financial services and grievance mechanisms could streamline processes, while artificial intelligence-powered chatbots can offer real-time assistance. Blockchain technology could enhance transparency in redress, and virtual financial assistants could provide personalised advice and support in managing finances and filing grievances. Setting up interactive digital kiosks in rural areas with limited internet connectivity will aid such innovations and significantly improve the efficiency and user-friendliness of India’s financial systems.
A multifaceted approach is necessary to ease grievance redress along with modernisation of financial systems. This should involve collaboration among various stakeholders, including regulators, financial and educational institutions, and consumer advocacy groups. Innovative ideas include developing mobile learning apps that employ gamification for engaging micro-learning modules and broadbasing financial education. Integrating the redress mechanism with digitalised financial literacy efforts is key. Additionally, community-based workshops, social media campaigns, and collaborations with registered advisors can help disseminate financial knowledge.
The Financial Sector Legislative Reforms Commission (FSLRC) has proposed setting up of a centralised unified grievance system for all financial services operating independently of regulators to handle retail consumer complaints through mediation and adjudication. Financial Redressal Agency, the proposed agency, would provide a single point of contact for consumers to lodge complaints, eliminating the need to approach multiple agencies. The time is ripe to revisit the FSLRC’s recommendations and implement a unified grievance redress system for the financial sector.
An efficient, technology-driven unified financial grievance redress system will not only resolve issues promptly but also strengthen public trust in the financial ecosystem, potentially leading to a surge in retail participation in India.
The author is IEPF Chair Professor at NCAER, Delhi. Views are personal.