No free lunch for bank customers now

Source: The Hitavada      Date: 10 Apr 2017 10:47:25

By Sudhakar Atre,

THERE was a uproar when State Bank of India announced the minimum balance requirement for saving bank account for customers to Rs 5,000 in metros, Rs 3,000 for urban and Rs 2,000 for semi-urban and Rs 1,000 for rural branches respectively effective from April 1. It also said failure to comply with these rules will attract penalty ranging from Rs 20 to Rs 100.

There is an argument that this will be against the policy of the Government to move from informal economy to formal economy as other public sector banks (PSBs) will also follow the big brother. But before jumping to conclusion some facts need to be discussed.

Firstly, it is not the SBI alone which has prescribed these requirements. Almost all PSBs in general and private sector banks in particular have these regulations in vogue. Some PSBs had relaxed these regulations during demonetisation.
Secondly, the rule of minimum balance and penalty for failure of meeting the same does not apply to basic savings accounts or financial inclusion accounts such as PMJDY, so it will not affect the poorest of the poor and those who are newly introduced to the banking system by way of Jan Dhan accounts.

Hence, the fear that the move will deter a large section of new entrant basic banking customers from putting their money in the bank is unfounded.

However, it is an open secret that PSBs have been treated as an extended division of the Government and have been forced to operate like a charitable NGO and not like professionally run/ commercially viable institutions unlike their private sector competitors.
But of late mounting losses due to rising NPAs, huge technology costs and consequent need to tap capital markets to maintain CRAR have forced PSBs to think about their profitability also for their survival.

In this backdrop, PSBs have right to operate in a level playing field competing with their private sector competitors. Private sector competitors like ICICI Bank, HDFC Bank have had this minimum balance/ penalty on non-compliance requirement for long and in a much higher scale. For example largest private sector bank has fixed the minimum balance for metro and urban locations at Rs 10,000, semi-urban locations at Rs 5,000 and rural locations at Rs 2,000.

It charges Rs 750 per quarter for non-maintenance of minimum monthly average balance.
PSBs have opened the maximum number of accounts under Jan Dhan programme, but they cannot levy charges on Jan Dhan account holders to recover the cost since this will discourage the new entrants from continuing to use the banking channel. But banks need to recover the cost. Then the issue is whether these minimum balance requirements and penalties are more than what it should be.

But as per information available PSBs minimum balance requirements and the penalties still count the lowest in the industry compared with its private sector counterparts.
The recent decision by banks to impose charges on high value cash transactions beyond a limit is actually a continuation of the digitalisation move. This will encourage people to use non-cash methods to transact. The low cost deposits offer better leverage to banks for their profitability and hence now there is a competition to attract high value current and saving bank customers by offering them better services. For accounts with lower balances, charges are low or non-existent but naturally, the facilities to these customers are also fewer. Similarly, savings accounts with higher balances are offered better services.

Like any other business, banks also levy charges for the quality of the services. It will not be out of place to compare the cost of the coffee at different restaurants which varies from Rs 10 to Rs 500 depending upon the ambience and quality of service.

Here again the consumer choose it having regard to his affordability and taste. Hence the point of debate should be the cost of service vis-à-vis its quality and their transparency so that customers can find out all the charges associated with their transactions to compare their options and switch to banks that are better suited to their needs and requirements.

Ultimately, banks which will offer value for money will prevail. Customers will also have to understand that now the era of free lunch is over.