No matter what provisions are made when you have demand and not enough supply, there will be inconvenience ! That's what is happening in India, there is over booking everywhere on buses, trains and even airlines these days. Indian Railway system is the largest in the world and whatever we may say, it is quite well managed ..
Pay no mind to those who talk behind your back, it simply means that you are two steps ahead !!!
I agree with your suggestion, if they cannot confirm your waiting listed ticket they should treat it as general ticket and refund the reservation charges on destination station without any deduction or say 10/ per ticket.
The Indian Railways, has revised many rules. Railways say, these revised rules are meant for discourage Touts and Ticketing agencies who engage in black marketing tickets.
Some of the newly introduced rules are
Cancellation fee of a second class confirmed ticket 48 hours before the scheduled departure has been increased to Rs. 60 from Rs. 30. Similarly a third AC will cost Rs. 180 as against earlier cost of Rs. 90.
Railway Minister Suresh Prabhu says, the reason for revising the rules is due to a decline in Diesel. a major source of fuel for the Railways
This is what we all read in newspapers but what do you suggest. WE should suggest what should be reasonable for both government and genuine passengers at the same time.
If the Seats or berths are available, converting the waiting tickets in to a next available class is what I suggest. This will not cause any loss to the user or the Railways.