Failed ATM Transactions cannot be Counted as Valid says RBI
The Reserve Bank of India (RBI) has finally responded to customers being wrongly fleeced by banks and clarified that transactions that have failed due to technical reasons, or when there is no cash withdrawals at automated teller machine (ATM) cannot be counted as valid and bank cannot charge customers for them. 
 
In a notification, RBI says , "...transactions which fail on account of technical reasons like hardware, software, communication issues; non-availability of currency notes in the ATM; and other declines ascribable directly or wholly to the bank or service provider; and invalid PIN or validations will not be counted as valid ATM transactions for the customer. Consequently, no charges therefor should be levied."
 
"Non-cash withdrawal transactions such as balance enquiry, cheque book request, payment of taxes, and funds transfer, which constitute ‘on-us’ transactions or when a card is used at an ATM of the bank, which has issued the card, shall also not be part of the number of free ATM transactions," the central bank says. 
 
This means that only successful transactions at the ATM would be counted as valid and would be free, as applicable or charged as per the issuer bank policy. It is however shocking that banks have been charging for such transactions for such a long time. In fact, in response to a specific query from Moneylife, Bank of Baroda’s CEO had clarified that no failed transactions were charged by the banks. Hence, it would be interesting to know which banks had charged for the transactions, how much money was collected against such failed transactions or when no cash was withdrawn and whether RBI is in any position to calculate these amounts. 
 
The RBI notification is silent on withdrawal limits at ATMs imposed by banks. For example, a savings bank account holder of State Bank of India (SBI) can withdraw maximum of Rs20,000 per transaction using her classic debit card. HDFC Bank allows maximum cash withdrawals of Rs25,000 to Rs1 lakh depending upon the type of card and account. Similarly, ICICI Bank also allows maximum cash withdrawal of Rs50,000 to Rs1.50 lakh as per the type of account.
 
In most cases, if the customer is using ATM of other than her issuer bank then the maximum cash withdrawal limits comes down to half. This in other words mean, a customer of SBI, who is using ICICI Bank ATM would have to consume two transactions to withdraw Rs20,000. However, the latest RBI circular is silent on this limit.   
 
Almost every bank customer has faced this situation while making transaction at any ATM. However, despite the transaction remaining incomplete due to technical reasons, banks used to count it as valid transaction. Since every bank has placed a limit for certain numbers of free transactions at ATMs, once this number is crossed, customers were being charged additional fee per transaction. Banks were considering each transaction, whether successful or failed as valid transaction to levy charges.
 
With the RBI's new notification bank customers would be charged only for successful transactions (cash withdrawal) at any ATM. For non-cash transactions at own bank ATMs, there would be no charges.
 
ATM charges and poor service is only a part of the problem of bank’s attitude to customers and their various charges. Banks have been found charging even for failed card transactions or for transactions declined due to insufficient funds. This is applicable not just for ATMs but also for point of sale (PoS) transactions. If there is insufficient balance in the account due to which the transaction is declined, then banks were levying a charge of Rs17 to Rs25, plus goods and service tax (GST).
 
In June this year, the central bank had proposed a review of ATM interchange fee structure. A certain number of transactions from non-issuing bank’s ATM are allowed by the issuing bank but on exceeding a limit, all further transactions are charged. Such charges differ from one issuing bank to another. Those in smaller towns and holders of no-frills accounts will continue to have five free transactions.
 
At present, banks offers three number of free transactions, including financial and non-financial, in metro and non-metro locations. Afterwards, the charges stand at Rs20 plus GST for financial transaction and Rs8 plus GST for non-financial transaction. 
 
RBI, as usual keep saying that banks are free to decide or offer more number of free transactions per month at own or other bank ATMs in any geographical area. 
 
Concerned with rising and arbitrary bank charges, Moneylife Foundation had sent multiple memorandums to the RBI governors. One of 9 September 2014 was on “Usage of ATMs-Rationalisation of number of free transactions” sent to the then governor Dr Raghuram Rajan, stated, "The setting up of ATMs by banks is to reduce not only the pressure on their counters, but also to reduce cost of operations through automation. By levying charges for use of ATMs beyond a certain number, banks are scuttling the optimum utilization of technology, thus depriving the benefits of technology to bank customers."
 
Nowhere in the world are customers charged for withdrawing money from their own accounts, while the bank earns revenue on their deposits. Banks provide this service to customers because of the spread that they earn between the interest paid to depositors and the rate at which they lend money. The spread has to cover transaction charges.
 
If banks want to start charging on transaction basis, then the spread that they earn on depositors money has to come down. The transaction charges are all the more illogical because in India, the spread on savings bank is one of the highest in the world. In fact, in India, even generally, spread is one of the highest. So in India, banks cannot charge for transactions. But then the bank customers are not organised like the banks’ own cartel and thus get penalised for withdrawing own money.
 
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    priyanka

    1 month ago

    Waking up from deep sleep

    Owning Responsibility: The Key Agenda for Reforming Public Sector Banks
    It is now four years since the National Democratic Alliance government announced a package of reforms to make the public sector banks (PSBs) efficient and healthy.
     
    After the Gyan Sangam, a conclave of top executives of the PSBs, the Reserve bank of India (RBI) officials and the representatives of the government held in January 2015, the government unveiled a slew of measures intended to nurse the banks back to health. The measures encompassed seven areas namely,
     
    A. Appointment of heads of PSBs, 
    B. Setting up of Bank Boards Bureau, 
    C. Capital infusion, 
    D. De-stressing of non-performing assets (NPAs), 
    E. Empowerment of managements, 
    F. Framework for accountability and 
    G. Governance reforms. 
     
    Picking a key alphabet of every area—the first seven alphabets of English—the policy makers coined the term Indradhanush. What is the progress achieved during these four years and what are the plans NDA II has unveiled to carry forward the reforms?
     
    First, let us have a quick look at the specific steps taken by the erstwhile NDA government under the package. 
     
    Out of the seven, three were in the public domain: bank boards bureau, capital infusion and de-stressing of NPAs. On the remaining four, hardly any forward movement has so far taken place, barring some change in the appointment of bank chiefs.
     
    In pursuance of the recommendations of the PJ Nayak Committee on Governance, the government constituted the Bank Boards Bureau (BBB) in April 2016 with former Comptroller & Auditor General of India, Vinod Rai as its chairman. A finance ministry press note of August 2015 had declared that BBB; 
     
    ….will be a body of eminent professionals and officials, which will replace the appointments board for appointment of  whole-time directors as well as non-executive chairman of PSBs. They will also constantly engage with the board of directors of all the PSBs to formulate appropriate strategies for their growth and development. ….” (emphasis added). 
     
    In March 2018, Vinod Rai demitted his office with a series of recommendations to the government. Admittedly, much of what BBB had done during the two years was ‘work in progress’. More about this later.
     
    One tangible measure implemented by the government, like the UPA (United Progressive Alliance) governments earlier, was to recapitalise PSBs to shore up their capital. According to one source, during the four years from 2015, PSBs were recapitalised to the extent of Rs3,12,000 crore, through Budgetary allocation, recapitalisation bonds and market borrowings. In the first Budget of NDA II, the government has announced a booster capital injection of Rs70,000 crore.
     
    The second major step taken by the NDA is to reduce the number of PSBs by two instalments of mergers. This was not in the package, though. The process of bank mergers started by the erstwhile UPA government by merger of two associate banks with State Bank of India (SBI) in 2008-2009 was continued: in 2016-17 the remaining five associates and the Bharatiya Mahila Bank were merged with SBI itself. During 2018-19, the government announced the merger of the ailing Dena Bank and the profit-earning Vijaya Bank with the loss-making Bank of Baroda.
     
    The third measure taken by the NDA government was to split up the post of chairman & managing director into two: with a non-executive part-time chairman and a whole-time managing director (MD) who would be the chief executive officer (CEO) of the PSB. This was in line with the recommendation of PJ Nayak Committee.
     
    Apart from these steps, some legislative measures were also undertaken by the government. At the statutory level, in 2016, the government enacted The Insolvency and Bankruptcy Code, 2016 (IBC, 2016). It was a comprehensive legislation consolidating the existing laws related to reorganisation and insolvency. It was intended to create a framework for quicker winding up or strategy for the turnaround of sick companies. Earlier in 2015, through a statutory enactment the Micro Units Development Refinance Agency Ltd (MUDRA Bank) was established to promote refinancing to small units.
     
    More Serious Issues: 
     
    While on three out of the Indradhanush package, a forward movement was made, on the remaining four not much of serious efforts are visible. These have long-term implications and could have helped the PSBs to lay the foundations to surmount future risks. These issues need greater deliberation.
     
    Non-performing assets (NPAs) continue to hog the limelight even after launching the package of reforms. The latest annual reports of PSBs recorded further addition to the already bloated NPAs compelling them to make higher provisioning towards the stressed assets denting their net profits; some banks are in deeper red than they were in the preceding years. The merger of Dena Bank, which has been in the red for successive three years without seriously addressing its NPA problem, invited a criticism that the government wanted to put the stressed assets of the Bank under the carpet. Bank of Baroda which was to absorb the sick Dena Bank was already under losses in 2016 and then again in 2018.
     
    The ministry of finance (MoF) claimed in June this year that the gross NPAs of PSBs declined from Rs8,95,601 crore in March 2018 to Rs8,06,412 crore in March 2019 (press release dated 25 June 2019). The bulging NPAs necessitated regular write-offs. It is on record that while during the 10 years ended 2018 about Rs7,00,000 crore were written off by PSBs, and between 2014 and 2018 the amount was as much as Rs5,55,603 crore accounting for about four fifths of the write-offs of the decade.
     
    In the other three areas which could have triggered a qualitative difference in the functioning of the PSBs, not much has been heard during these four years. On the empowerment of boards, on the issue of accountability and on governance reforms, we do not see pathbreaking changes. The CEOs continue to be posted for short terms, in some cases for a term of 15 months. Boards are not fully constituted with the mandatory appointments of two employee directors not appointed since 2016; the appointment of other directors continues to be non-transparent. Most PSBs mention in their annual reports the backgrounds of their directors. A perusal of the profiles does not reassure us about their independence as well as professional competence to guide large national level banking corporations. 
     
    The issue of corporate governance continues to remain unaddressed. No specific measures have been carried out although the annual reports of PSBs carry longish narrations of ‘corporate governance’. 
     
    Had some measures been taken in right earnest from 2016, the decline in the performance of PSBs could have been arrested or reversed. There is no indication of the measures the government has in its armory which can bring in a qualitative change in their performance. 
     
    Spurt in Frauds:
     
    An area of major concern is how to prevent or reduce the incidence of frauds in PSBs. According to a senior RBI official, during FY18-19 the total value of reported frauds amounted to Rs71,543 crore as against Rs41,167 crore reported in FY17-18, recording a 73 per cent jump in a year (PTI report published on 5 July 2019).
     
    The cumulative total of the amount involved in frauds from FY14-15 through FY18-19 was of the order of Rs1,74,798 crore. The same official reveals: “the most expensive frauds are committed by management teams who have the ability to override control systems and collude to cover their tracks.” (emphasis added). This underlines the collusion between the senior bank officials and the borrowers.
     
    In October, last year, the Central Vigilance Commission (CVC) had come out with a study of top-100 frauds. According to that document, failure of internal control and monitoring, failure of controllers to pick up the alert signals in time, poor risk management and inadequate standards of corporate governance were the major factors contributing to frauds. The current spurt in frauds underscores the urgency in addressing the issue. 
     
    BBB-a Work-in-progress?
     
    BBB was set up in 2016 as part of the Indradhanush package, with a broad mandate for evolving appropriate strategy for development and growth of PSBs. The compendium of recommendations (CoR) submitted to the government by Vinod Rai while demitting his office in March 2018 as chairman focused on the major areas requiring urgent and serious attention from the government. 
     
    The areas were: 
     
    a.) Appointments of directors
    b.) Compensation
    c.) Performance assessment
    d.) Governance reforms
    e.) Code of conduct and ethics
    f.) Strategy and
    g.) Human resources
     
    The CoR had documented the problems faced by the PSBs under each head and had recommended the way forward.  But as it happens in our system, the CoR has apparently gone into the archives!  A successor was appointed last year but currently BBB’s role is limited to selecting executives for the top two posts of MDs and executive directors in PSBs.
     
    The New Plan:
     
    It is learnt that the MoF has now a plan to evaluate the performance of PSBs through a comprehensive questionnaire encompassing 16 key performance indicators. This exercise is essentially to collect data from the banks. The ministry claims that it “will cover eight  thematic papers by domain experts and will also include a review of the banks” performance during the past five years. The process will be aimed at alignment of banking with national priorities, stimulating ideas and inculcating a sense of involvement among bankers down to the branch level. By its very nature it suffers from two drawbacks: for banks it will be another elaborate form-filling exercise as it spans five years and, second, it will be an exercise in micro-management. The more fundamental issues are not on the radar of the government.
     
    It may not be out of place to recall that, during the late-1980s every bank was asked to prepare a two-year action plan and submit it to the RBI. At the end of every quarter, the CEO and his team would meet the RBI to interact with its senior officials. At the regulator level it could be fine, but at the government level it becomes an exercise in micro-management. Government should limit itself to laying the policies and periodically reviewing their efficacy.
     
    The Way Forward:
     
    The results of the first quarter of FY19-20 have not been reassuring. Nor does the Budget speech of the new finance minister made on 5 July 2019. In the meantime, RBI governor Shaktikant Das waxed eloquent about the governance reforms needed during his June address at National Institute of Bank Management, Pune as well as in his foreword to the RBI’s Financial Stability Report, June 2019.
     
    While as the majority stakeholder and owner, the government has a duty to shore up the capital of PSBs through recapitalisation, it should be simultaneously followed by structural reforms. Following areas cry for urgent attention:
     
    1. Professionalise the boards of banks, streamline the appointment of CEOs and EDs with longer terms, say three years, as recommended by many committees.
     
    2. Evaluate their performance and introduce accountability at the top level.
     
    3. Address the current serious shortcomings in human resources policies by introducing a collaborative organisational culture 
     
    4. Promote an organisational culture with emphasis on knowledge, right skills and aptitude which can take care of the problems of poor credit appraisal, risk identification and timely diagnosis.
     
    In 2013, UK’s parliamentary commission on banking standards had identified five themes to enable restoration of trust in banks. Among them, two are of particular relevance to us:
     
    a. making individual responsibility in banking a reality, especially at the most senior levels; 
     
    b. reforming governance within banks to reinforce each bank’s responsibility for its own safety and soundness and for the maintenance of standards.
     
    These themes need to be incorporated in our approach to reforms in PSBs. Five years between 2014 and 2019 have been nearly lost. Mergers of banks and fresh capital induction do not address long term structural issues. And as ICICI Bank’s trouble revealed last year, privatisation of ailing PSBs is not a panacea either. The current government has a major challenge to address in reforming the PSBs.  
     
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    B. Yerram Raju

    1 month ago

    This is an untiring narration of the status of PSBs. Banks' downfall started after the adoption of universal banking. Third party products received more attention than banking products. Several Managers even now ask an intending depositor to take an insurance policy or buy a mutual fund. Internal performance reviews lay emphasis not on progress in banking but on the targets of third party products. All government schemes are reviewed but with a focus on targets and not on quality of lending. Training is more on systems than on core banking. Pick up randomly an officer and ask him about NI Act key provisions or Indian Partnership Act or latest Company Act amendments or on risk management - credit and environment risks in particular. The responses are highly disappointing.

    E-Circulars are read only to capture the interest rates and charges to be levied on customers, which any way the system will automatically take care of. Although Government of India announced that digital services will be free of charges for one year, I am astonished to find that payment by credit card for electricity consumption bills carry 2.5% extra; payment through net banking 0.80%. Debit card payments are free of charges.

    Credit risks at the point of origin and monitoring credit use for MSEs are evidenced more by inspection charges for inspections never done. The charges bear the endorsement of superiors. Accountability for failures is shifted to the borrower. Credit without extension and advice to the farmers and MSEs would have the casualty of compliance risk. But who cares?

    Banks lending platforms are all group driven and individuals can't be held responsible for failures save exceptions.

    Banks shall do banking. Top Managements should be held responsible for not taking decisions in time bound manner and not for taking decisions. NPAs are a part of lending process as they are true reflection of risk. But not taking action in good time to counsel the borrower and put on track the blame should rest with the bank. But this has just not happened for more than 10 years!!

    Cleaning up the banking should precede pumping stimulus through capital infusion.

    REPLY

    JIMMY THOMAS

    In Reply to B. Yerram Raju 1 month ago

    Superb sir, I am banker and agree with your perfect analysis. I wish our policy makers could read your simple but effective analysis

    Ramesh Poapt

    1 month ago

    well said!!!

    Bank Sector Risks May Rise as RBI Encourages More Lending: Fitch
    Risks in India's banking sector may rise as a result of the Reserve Bank of India (RBI)'s recent steps encouraging banks to lend more to non-bank financial institutions (NBFIs) and retail borrowers, says a report.
     
    In the research note, Fitch Ratings says, "These initiatives are designed to help keep credit flowing to the real economy amid signs of a slowdown. Averting a significant slowdown would help borrowers and therefore the stability of the financial system, but the measures could push up banking-sector risk if they lead banks to accept higher credit risk than they previously had appetite for."
     
    According to the ratings agency, India's constant nudging of banks to lend more to NBFIs is in contrast to the global trend of authorities trying to break the linkages between banks and NBFIs. 
     
    India's overarching approach across the financial system is aimed at achieving a more inclusive financial system in which bank savings can support lending to parts of the economy that are beyond the banks' distribution network or risk appetite. However, Fitch says, this increases the potential of risks in the NBFI sector spilling over to banks, exacerbated by the limited capacity of India's capital markets to provide extra funding to NBFIs.
     
    To encourage banks lend more, RBI in August has announced three main steps, an increase in the single-exposure limit to 20% of Tier 1 capital (from 15%); priority lending status for credit to NBFIs for on-lending to finance agriculture, small businesses and home-buyers; and a reduction in the risk weight for consumer loans (except credit cards) to 100% (from 125%). 
     
    This follows several other initiatives in recent months to boost lending, including harmonising risk weights on NBFI exposure, allowing banks to raise additional liquidity by selling excess government securities, and a partial credit guarantee from the government on banks' asset purchases from NBFIs.
     
    The NBFI sector, historically an important provider of consumer loans in India, is under significant funding pressure as investors shy away following the default of Infrastructure Leasing & Financial Services Ltd (IL&FS) in 2018 and Dewan Housing Finance Corp Ltd (DHFL) this year. 
     
    NBFI disbursements have declined steeply as a result, with knock-on effects to other sectors, particularly consumption. Reduced availability of financing has contributed to the slowdown in India's auto sector, with vehicle sales in July falling 31%, according to the Society of Indian Automobile Manufacturers (SIAM).
     
    Fitch says, some of the pressure on NBFIs will be alleviated if banks now start to direct more funding to the sector, but we expect most of the benefit will go only to the strongest NBFIs. It says, most banks will be reluctant to lend to weaker NBFIs as they are focused on conserving their limited capital while grappling with legacy bad loans and a new wave of deteriorating asset quality.
     
    "The reduction in the risk weight for consumer loans will give a small boost to banks' regulatory capital ratios (we estimate 1.3pp on average). This will enable banks to lend slightly more for each unit of capital, which would be positive for loan growth but negative for their overall credit profile if the extra lending is riskier than average."
     
    "The increase in the single-exposure limit is likely to have a more significant effect on lending as it will allow some banks to lend significantly more to NBFIs. Large NBFIs, whose bank funding previously came from a handful of large banks, will be able to get additional funding from these and other banks as a result of the higher limit," the ratings agency concluded.
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    Gautam Ray Chaudhury

    1 month ago

    Bleeding all over the financial highway... Banks.. NBFC.. Now creeping slowly to the SME and MSME segments.. Mudra has started dancing to the tune of NPA master... Is the big next.... Microfinance sector as the clients are said to be over leveraged and exposed to differnt socio economic shiftment... All these would not augur well for our dream of reaching $5trillion economy...

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