What bankers get from charging for ATM use is peanuts compared to what they are losing in NPAs

On 15 August, 2014, the 68th Independence Day, our Prime Minister Narendra Modi announced a scheme called Pradhan Mantri Jan-Dhan Yojana in the cause of financial inclusion in our country for the benefit of millions of families who do not have bank accounts so far. Under this scheme every bank account holder will be given a RuPay brand debit card with an accident insurance cover of Rs1 lakh guaranteed for each poor family, so that all such families are covered with accident insurance to meet any crisis in their lives.

A day before this announcement by the PM, the Reserve Bank of India (RBI) announced certain changes to the ATM facility offered to bank customers and the charges levied for withdrawals through ATMs with effect from 1 November, 2014.

What are the changes introduced by RBI for ATM withdrawals?

The present rules for ATM withdrawals are as under:

1. At present every ATM card holder could withdraw cash from the same bank’s ATM any number of times free of all charges. For example, if you have an account with State Bank of India (SBI), you could withdraw cash or do any other non-cash transactions from ATMs of SBI any number of times in a month with out any charges.

2. Secondly, at present, you can transact or withdraw cash from other banks’ ATMs also, but only five times a month without any charges. For withdrawals beyond five times in a month, you are being charged Rs.20/- plus service tax for every such withdrawal.

3. These rules are applicable even for non-financial transactions, like using the ATMs for balance enquiry and seeking details of last five transactions in your account. In short, usage, for any purpose, of ATMs of your own bank where you maintain your account is totally free, but you can use other banks’ ATMs also for  maximum of five times in a month without any charges.

These rules are going to change with effect from 1 November, 2014, courtesy RBI’s revised guidelines in the name of “rationalisation of free transactions on ATMs.”

The revised guidelines are as under:

1. Each bank is required to offer a minimum of five free transactions in their own ATMs to their own customers. This includes both financial and non-financial transactions.

Banks are free to charge their own customers for transactions beyond five per month, even in their own ATMs at Rs20 plus service tax per transaction. This is in stark contrast with the unlimited free transactions presently available with your own bank ATMs.

2. Secondly, the number of mandatory free ATM transactions for savings bank account customers at other banks’ ATMs is reduced from the present five to three transactions per month (inclusive of both financial and non-financial transactions) for transactions done at the ATMs located in the six metro centres, viz. Mumbai, New Delhi, Chennai, Kolkata, Bengaluru and Hyderabad.

3. This reduction will, however, not apply to small / no frills / Basic Savings Bank Deposit account holders who will continue to enjoy five free transactions, as hitherto.

4. At other locations i.e. other than the six metro centres mentioned above, the present facility of five free transactions in other banks’ ATMs for savings bank account customers shall remain unchanged.

The biggest blow for the customer is the freedom given to banks to charge their own customers for using their own ATMs beyond five transactions per month. This includes cash withdrawal, balance enquiry, cheque book request, details of last five entries in your account etc. All such transactions are counted for the purpose of levying charges beyond five per month, which means, you have to pay for withdrawing your own money from your own bank account or even to know the balance in your own account, as if it is a penalty for depositing your surplus cash with your bank.

As per the latest statistics, India’s population is over 123 crore. Out of this 29.5% i.e. 36.43 crore of the population are said to be poor and they do not have any bank account now. To add to this pitiable state of affairs, it is also stated that 25.96% or 32.05 crore of people are presently considered as illiterate, due to which they find it difficult to operate bank accounts. Against this background, the Prime Minister has just announced a massive program of financial inclusion and within the next three years 15 crore people will be brought within the banking network by offering them incentives like a debit card with free accident insurance for Rs1 lakh per account.

Who wins and who loses in this game of one up-manship?

Let us analyse who wins and who loses in this game of one up-manship. RBI says,  “recently, a few banks and the Indian Banks’ Association (IBA) had approached the Reserve Bank seeking changes in the extant instructions regarding free transactions at other banks’ ATMs. Referring to the growing cost of ATM deployment and maintenance incurred by banks, on the one hand as well as the rising interchange out-go due to these free transactions, the IBA had sought the removal of free transactions at other banks’ ATMs at metro centres and other large townships in the country”.

Unfortunately, IBA does not appear to realise that what they are suggesting cuts at the root of the banking tree, because, current and savings deposits (CASA) form the back bone of banks’ operations, it is the cheapest form of funds available to banks and a steady stream of growing business, which is being scuttled by making it unattractive for people to keep surplus funds in their savings account, forcing them rather keep it in their own homes, hoard the cash in their cupboards so as not to pay these high charges to banks.

By restricting free usage of ATMs, IBA feels that banks can make a little more fee income through levying charges on the hapless bank customers. But what is not possibly realised is that what they get from this source is peanuts compared to what they are losing in droves, through NPAs and concessions given on restructured accounts, which have been the main cause of distress faced by banks at present.

Middle class and the lower middle class hardest hit:

If you analyse further, it is the ordinary middle class and the lower middle class who keep their surplus funds in savings bank accounts suffer most, as they are the people who use the ATMs for their cash requirements. The rich and the ultra rich generally do not have to draw cash from ATMs, because they hold adequate cash in their tills as they do not wish to deposit cash often in banks for fear of getting enquiries from the income tax (I-T) department. The upper middle class prefer to invest their surplus cash in other investment avenues like mutual funds or stock markets, which yield much higher returns than bank deposits, leaving little balance in savings accounts. It is the middle and the lower middle class, who constitute nearly 300 million of our countrymen and women keep all their savings in banks, though it is earning virtually negative real returns for them due to the prevalence of high inflation in the economy. It is they who suffer most by the change in ATM rules, adding insult to injury.

Banks are the biggest beneficiaries of proliferation of ATMs:

According to RBI, the number of Automated Teller Machines (ATMs), which stood at a little over 27,000 as at end-March 2007, has increased to over 1.6 lakh across the country by end-March 2014. At the cost of repetition, let me reiterate what I had said earlier in these columns, that the biggest beneficiaries of proliferation of banking facility through this route of ATMs are none other than banks themselves for the following reasons:

1. The main reason for banks to open more and more branches in smaller towns is to attract more customers, who will keep their surplus funds in these types of accounts. In fact, opening of a current or savings account is the beginning of a relationship with a bank and banks are vying with each other to get maximum number of these accounts to improve their low cost deposits, which help them to increase their net interest margins. But as setting up of full fledged branches is expensive, cumbersome, and time consuming, banks resort to the cheapest and easiest way to reach out to people by setting up ATM kiosks, which attract people to open their account even if the branch of the bank is a little far away from their place of residence, as operating the account becomes easier through nearby ATMs. So the main purpose of setting up ATMs is to attract people to open their accounts, and it has really benefited banks by getting cheap deposits in a cost effective way.

2. With a large number of ATMs being installed by banks, which are more than the brick and mortar branches, it has helped to considerably reduce pressure of work on the counters of bank branches, facilitating quick disposal of customers, lesser paper work and more time for staff to attend to other pressing jobs. This has resulted in bringing down the number of employees in each branch of a bank, saving considerable employee cost which is the second highest expenditure for any bank after interest cost.

The aforesaid facts are evidenced by the following tables:

The above figures clearly bring out the following facts:

1. The CASA deposits have grown by 467% in terms of amount and 146% in terms of number of accounts.

2. The corresponding growth in number of employees is only 13% in respect of clerical staff and 30% in respect of all employees.

3. The perceptible reduction in growth percentage in number of employees is partly due to introduction of core banking technology in banks and partly because of expansion in delivery channels through ATMs, which are now considerably more than the brick and mortar branches.

4. All ATMs are unmanned self-service kiosks, which do not require large deployment of human resources, and this is a distinct advantage for banks resulting in huge savings in employee cost as stated above.

5. The much lower growth in clerical staff (at 13%) is a concrete evidence of the fact that due to the large introduction of ATMs, there is much less pressure on the counters of banks, which are normally manned by clerical staff.

6. By employing much lower staff, the banks have benefited considerably not only in terms of employee cost, but also in terms of rental and capital expenditure on physical infrastructure required for setting up brick and mortar branches, which is substantial by any standards.

7. During one of the seminars on banking, RBI officials have acknowledged that as per their study, the ATM based transactions cost about 20% of the branch banking cost, which can be brought down further by extending and expanding the facilities made available through ATMs.

8. The most invisible benefit derived by the introduction of ATMs is the much lower percentage growth in customer complaints as compared to the growth in number of accounts, as ATMs have succeeded in bringing down the footfalls in branches of banks resulting in much lesser friction between bank staff and customers, which is a distinct benefit not realised by the banking industry so far.

Are banks, therefore, biting the hands that feed them?

It is, therefore, abundantly clear that the banks have benefited both in terms of garnering more CASA deposits and lower cost of operations due to the introduction of ATMs during the last more than 10 years. But the benefits of such distinct improvement in earnings of banks have not been passed on to the banks’ customers as bank charges have been going up year after year on some pretext or other.

If RBI hopes that competition will drive banks to offer better terms to customers than prescribed by RBI, they will be sorely disappointed because past experience does not inspire any confidence to this effect. RBI had granted freedom to banks to fix their own interest rates on savings bank deposits couple of years back with the hope that competition as well as market dynamism would drive SB interest rates. But unfortunately, not a single bank in the public sector has made any changes to SB interest rates which continue to be 4% pa for the last several years across all banks, barring a handful of smaller private banks, indicating a semblance of cartelisation in the banking industry as well.
                        
It is pertinent to mention here that as per the media report dated 9 January 2014, Dr KC Chakrabarty, the then Deputy Governor of RBI had said: “It is very very ridiculous that banks are charging customers for withdrawing money and that too from their own ATMs – it never happens anywhere”.

The changes proposed are, therefore, neither in the interest of bank customers nor the banks themselves, and it is a retrograde step, as it adversely affects the spreading of banking habit among the poor and the down trodden, who can ill afford to pay these high charges levied by banks for the use of ATMs. There is certainly no case for banks to curtail the existing facilities available to ATM users, much less in their own ATMs for their own customers, as imposing additional charges on the depositors will only result in negating the efforts of the government in spreading financial inclusion, which is being attempted at a very heavy cost to the exchequer. There is no doubt, therefore, that by restricting free usage of ATMs, banks are “biting the hands that feed them”, hurting both the banks and their customers.  

(The author is banking analyst and he writes for Moneylife under the pen name ‘Gurpur’)