Can we have banking without charges & penalties?

Today banks levy all kind of charges and penalties to bank depositors and account holders without any rhyme or reason. Are these charges justified?

You withdraw your own deposit before the due date and you pay a penalty. You maintain a lower balance in your savings bank (SB) account and you pay a penalty. You withdraw your own money from ATMs of other banks beyond five times in a month and you pay a penalty. You do not operate your account for more than one year, you pay a penalty. You operate your account beyond a stipulated number of times, you pay a penalty.

There are umpteen areas where penalty is levied in the form of variety of charges for the mistake you have committed by opening an account with a bank, who is courting you till you open the account. And you pay a penalty even for closing the account. It is difficult to keep track of the multiple methods in which your account gets debited by your bank and you have no choice but to silently suffer because these charges are all mentioned in some corner of their website, which you had confirmed having read without reading it because you had signed on the dotted lines when you opened the account. In fact you are lending money to the bank by keeping your funds with it which helps the bank to earn profits by relending your money to trade, commerce and industry. Therefore, are these penalties or charges, by whatever name it is called, justified? Does it not tantamount to cutting the hand that feeds you?

The Reserve Bank of India (RBI) has, after much deliberations and delay, finally relented and advised banks not to levy pre-payment penalties on home loans foreclosed before their due dates, that too in respect of only loans carrying floating rates. They are yet to consider waiver of pre-payment penalty on fixed rate loans, though its own offspring, the National Housing Bank has waived on all type of loans.

A few days back, the finance minister in his parting gift to the banking public had asked the banks to provide electronic transfer of funds from one bank to another free of all charges. But as the saying goes in Kannada, "Devaru Kottru Pujari Bida" meaning "God wants to give but the priest is coming in the way", a RBI official has firmly declined to accede to the wishes of the FM as he feels that free electronic fund transfer is not viable for the banks. We can, however, empathize with the RBI official, because the officials of RBI generally do not have the practical experience of retail banking and consequently he may not know the nitty-gritty of branch banking. Banking has undergone a metamorphosis and with the introduction of core banking solutions, technology plays a major role in the functioning of branches, thereby saving substantial cost of operations for the banks. And to consider that it is not economical to offer e-transfer facility free of charges is in variance with reality.
The fact that computerization has benefitted banks immensely can be gauzed from the following statistics released by RBI in its publication: Profile of Banks 2010-11.

It can be seen from the above table that since the introduction of core banking solutions in banks, the productivity of employees has improved considerably during the last five years, and so has the profit per employee, while the wages as a percentage of total expenses have remained almost stagnant despite the revision in wages of all employees in 2010-11. This marked improvement has been possible due to the computerization of banks, which has helped in improving the business handled by the branches without commensurate increase in manpower.

The benefits thus accrued to banks due to introduction of technology have not been passed on to the customers, as the charges and penalties have gone up over the years, instead of coming down.

Looking from the angle of rationality, too, certain penalties and charges currently levied on the bank depositors are not justified and by abolishing these penalties the banks can veritably increase their business by leaps and bounds.

Let us analyse the case of penalty levied on deposits withdrawn before maturity from the following example:

You keep a deposit for five years carrying interest say at 10% per annum. At the end of two years you decide to prematurely encash the deposit and as per the present rules the bank will pay you interest for these two years at the rate applicable for a two-year deposit, that is say at 8%. Obviously you lose 2% interest because you have withdrawn the deposit earlier than the scheduled due date and the bank will recover this 2% from you while paying the deposit amount. In addition to this loss of 2%, if you are charged a penalty of 1%; it only amounts to double benefit for the bank and double loss for the depositor. As the saying in a vernacular language goes, "the banks want to eat with both the hands."  Is this justified?

One of the barometers of the strength of the bank is the level of asset liability mismatch position, if any, of each bank. By keeping the deposits initially for a longer period the customer is in fact helping the bank to reduce its mismatch in its asset liability position for the first two years in the above example, The banks should be grateful to the customer who keeps the deposit for longer periods, though a microscopic minority may withdraw their deposits prematurely, which from all angles benefits the bank rather than the customer.

Now let us examine the subject of withdrawing cash from ATMs. At present the RBI has mandated that banks should not levy any charge for using the ATMs for the first five transactions from another bank's ATM. The more the usage of ATMs, better it is for the banks for the following reasons:

1.    The banks will save considerably on paper work and manpower cost, if more and more transactions are carried through ATMs. It is estimated by the finance ministry that the cost of handling a cheque during it entire lifecycle comes to around Rs25 to Rs40 per cheque, if it is handled at the counter of a branch. This expenditure is saved, if the customer uses an ATM instead of withdrawing through the mechanism of a cheque.

2.    Manual dispensing of cash at the bank counters is always fraught with the risk of excess payment, which is totally avoided, if ATMs are used by the customers.

3.    In our country, on an average, every middle-class family would keep cash in their homes to the extent of at least Rs25000 to meet an emergency. This money hoarded at home would come into the coffers of banks, if the customers are assured of withdrawing cash from the ATMs liberally any number of times without any charges. It would enhance the savings deposits of banks, giving them the much needed low cost deposits, if ATM withdrawals are made totally free.    
4.    At present we have nearly one lakh ATMs in our country. It is expected that we will have more than two lakh ATMs within the next three years with the introduction of white label ATMs in the course of next one year. These ATMs will not remain idle if bank customers are allowed  withdrawal from ATMs free of cost any number of times and thus enable better utilization of these ATMs which otherwise would be a dead investment.                                                                     
I would, therefore, rather go a step further and advocate that in the interest of better utilization of the large investments made in ATMs and with a view to bring down the cost of branch operations, it is not only imperative to waive all charges for using ATMs but also for every transaction done through ATMs customers should be offered incentives either by way of cash back or through the reward system on the lines of what is prevalent in the credit card industry.

This will give a boost to the CASA (current account-savings account) deposits of banks, helping the banks to improve their profitability, which in turn will improve their capital adequacy ratios as well.

Now coming to the controversial subject of electronic remittance of funds through the National Electronic Funds Transfer (NEFT) facility from one bank to another, the finance ministry has called upon banks to waive charges up to Rs1 lakh per transaction for very valid reasons. There is a need to reduce paper-based remittances not only to save cost but also the environment. The ministry has also said that any loss of revenue can be made up through higher savings on the cost of cheques, besides saving on time and energy of the operating staff. The cheque system is also susceptible to frauds, which can be totally avoided by e-transfer.

The UK monetary authorities have already taken a policy decision to consign the cheques to dustbin of history and have advised the banks to completely change over to electronic transfer of funds within a stipulated time frame and stop issuing of cheque books thereafter. Though it may be too premature for us to emulate them now, it is necessary to incentivize bank customers to move with the times and mover over to the new system of electronic transfer by abolishing all charges and making it simpler and smoother for safe movement of funds from one account to another.

Heeding the advice of the finance minister, a couple of public sector banks have since announced waiver of charges for National Electronic Funds transfer (NEFT) facility up to Rs1 lakh and the RBI should take a cue from this and direct all the banks to not only follow suit, but make all e-transactions free of all charges and penalties in the interest of banking public, economy and the country as a whole.

We can go on and on to justify that many of the charges levied by the banks today are neither fair nor equitable. The fact of the matter is that more than 40% of our population does not have bank accounts, and still many people in the villages are reluctant to open a bank account for fear of losing their savings by the hefty charges levied by banks. The government is pushing the banks to go to villages for making available banking services to the hitherto unbanked areas for financial inclusion. But unless and until the RBI and the banks take a bold and progressive step of waiving most, if not all, of the charges and penalties on bank depositors, the plans of inclusive banking will remain a distant dream. On the other hand, if the RBI and the banking fraternity make up their mind and change the way in which banking is conducted today, we can possibly achieve a new realm of ecstasy in banking that can certainly be called Utopian.  

During the last days of Lehman Brothers in September 2009, BBC quoted Craig Warner, noted British screenwriter, who said: "If you talk to 100 people, 102 will tell you they hate bankers." Let us change this in India to say that if you ask 100 people at least 75 if not 100 will tell you that they love bankers. This is possible if and only if what is said above is put into practice.

 (The author is a banking analyst. He writes for Moneylife under a pen-name 'Gurpur')


1 decade ago
it is good if a other bank, that is a bank which u dont have an account with let u use it ATM for first five time free and them leavies a small charge for it,
the above article is misleading as the author want to use other banks and white ATM free of cost. how long will people like this insist on cross subsiding for there own benifit and kill the system before its even made a mark on our ecomomy.
1 decade ago
Banks can afford to pay interest only for the period funds are kept with them and so are in order to pay interest @ what is applicable for the period funds were with the Bank when premature withdrawl of deposit happens.

NEFT is offered free by a number of banks upto Rs one lakh because as per RBI directive Speed clearing facility is offered free by all Banks in India upto Rs one lakh and so by allowing NEFT facility free Banks are not losing any thing rather save Banks manpower as customer is doing all work himself.

ICICI BANKS NET Banking facility gives a detailed chart listing all types charges / penalties for various transactions and facilities but unfortunately this is available only after u login as a customer. however the major drawback is their customer is one of the worst i have across among banks and i had to lodgea complaint with their CMD Ms. Chanda Kochhar to get a problem resolved and still it required a couple of mails because initially her Sect also goofed up and their Senior Management team had be explained the goofups and it took a week to get a clear picture. other leg of this transaction was SBI they resolved the issue but refused to admit mistake and finally again had to tell them what might have gone wrong as if what was their reason as a software glitch then i had substantiated that the glitch was there for more than 10 days and it was not possible NEFT services in SBI would have been non functional for at least 10 days period i had referred.

NEFT other wise works good and offers services from 9.00AM to 7.00PM on hourly working cycles and in 2 working cycles one can know if the transaction is failed for any reason.

Money life can take up with RBI to ensure email of NEFT Cell of all member banks should be made available at net banking sites of every bank. SBI provides a complete list of contact particulars of NEFT Cells of all participating Banks and because of the problem faced with ICICI customer care this information came to light. otherwise like me SBI NEFT Cell would have also never known E mail ID of NEFT Cell shared by ICICI was not being responded at all but the mail box is live because mails sent over there didnot bounce.

CBI has the best arrangement for generation of login password and transaction password as customers are provided with a grid card immediately upon applying for net banking and this information is detailed very well in their website however staff at Branch level are ignorant about this. so a very good product is not marketed properly.

CBI issues Mastero cards as thery are without CVV the Mastero card can be used as an ATM card only so cannot be used as a debit card at POS terminals but by trial found out once u register the card ubder Mastercard secure it can be used for online shopping sites like airtel for recharging moniles but cannot beused at IRCTC for train tickets booking because it will ask for CVV which is not there in Mastero cards of CBI.

ICICI bank gives one time password in your mobile every time u try to do transaction thro their netbanking facility and this is best safe guard for netbanking.

so enjoy NEFT, Debit card at ATM amd POS terminals, Net banking and for FI PSBs are offering no frills account.

yes Banks like ICICI customer cell needs to be tamed other PSBs should make it compulsory for their stadd to use e products so that they can market the same to their customers because today a PSB like Andhra Bank can offer any service offered by Banks like ICICI and HDFC in a better manner because Andhra Bank can rather offer better service because their staff are own staff unlike Banks which have outsourced many activities who don,t know head and tail of transaction flow when a customers brings any problem to the notice of branch staff in Banks like HDFC and ICICI
1 decade ago
Are you a model customer? I am a Banker too and believe in the power of Safe ePayments.

Are you aware how many bank customers used to withdraw Rs100/- from the ATM's when the ATM withdrawals were free?

Are you aware as to how many bank customers issue cheques without maintaining proper balance in their accounts?

Banks should charge for the services rendered. It is a different topic, as to whether the charges are reasonable or not.

Have you not heard the fraudulent activities being done by bank customers via the ATM Cash Retraction method?
Yes, I am open to a discussion on this area

Safe ePayments Motivator
Dr VS Gogia
1 decade ago
Another area of unjustified charges is Annual Fee for ATM-cum-Debit Cards. On one hand banks insist that customers use ATMs and on other charge for ATM-cum-Debit cards. Even large public sector banks SBI Group and PNB do not offer free ATM card option as HDFC Bank offers. Even ICICI Bank has only chargeable ATM-cum-Debit Card offering. These charges should either be abolished or free ATM card option be available to customers. Another option may be, if customer has used the card only as ATM card during the year then these charges may be omitted to save on plastic.
1 decade ago
Point to note is that in earlier days of Paper banking & no pvt banks, all the services were Free and still Banks were profitable. One used to engage with the Bank's employees & relations were Human. Now, with Pvt sector banks & Core Banking solns, the human touch has gone away.
When I was waiting to resolve my Internet Banking pwd issue at SBI PBB branch at Powai, Mumbai, I was shocked to hear below exge between a customer & bank officer :-
C : My ATM PIN is not working. My card is inside the ATM. What to do?
SBI : Aapki kismat hi phooti hai to hum kya karen. PIN yaad rakhna chahiye naa.. (If you are an unfortunate soul, what can bank do. You must remember your ATM PIN).

Needless to say, after struggling with SBI PBB for over 6 months for my pwd issue, I closed my acct as Bank couldnt figure out why my pwd is not workng.
Dr VS Gogia
Replied to SANJAY SINVHAL comment 1 decade ago
I have been having problems with my SBI account Net Banking and linking it to existing ATM-cum-Debit card on another account under same customer Id for over a year. Still am operating that account like good old (non-ATM, Net Banking) days. Unfortunately I cannot close the account as that is my salary account. I just transfer all my salary to another account with IOB that gives me good banking experience along with free NEFT/RTGS on just Rs. 5000/- minimum balance.
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