The Reserve Bank of India has, according to reports, turned down the finance ministry’s suggestion that electronic funds transfers, or e-transactions in general, be made free for bank customers. The main reason cited for this is that no product or service should be offered free, as then it would not be commercially viable and so would not be scaled up. This needs to be contested. Banks’ major sources of revenue, other than net interest income, are fees for different services and investments. While income from investment can be quite volatile, fee-based income like remittance charges tends to be stable and, therefore, desirable. There is no reason to argue that all these three revenue sources should always stand on their own feet and there should be no cross-subsidisation. In a year of market volatility, income from buying and selling of securities can be low or negative, leading to cross-subsidisation from other activities. At the retail level, branch managers routinely ask customers looking for lockers to fork out a tidy sum as fixed deposits. Here interest income (from deposits that can be lent on) is sought to bolster the fee income from renting the locker. Similarly, a bank could use free remittance facilities as a marketing tool to get more deposits.
Systemic issues enter the picture when it is proposed that the banking regulator ask banks to move towards offering free electronic services, which is considered good for the system and the average bank customer. Under ideal free-market conditions, banks should be free to formulate their own marketing plans and incentives for attracting desirable businesses. But conditions in the banking sector are far from perfect competition. You need to get a licence to start a bank and accept deposits, which are then insured. This protects depositors from bank failure. So those owning bank licences do form a club whose interest will be to keep others out. What’s more, a major section of banking business in India is in the public sector, where incentives for senior officials can be quite different from what they would be if these banks were widely held.
On the other hand, the developmental role of the government is to raise the national savings rate by promoting the spread of banking by, among other things, offering easy and free electronic facilities. To be able to make an electronic transfer you need to make a deposit in the first place, and the mainstay of a large commercial bank is a large deposit base facilitated by affordable basic banking facilities. Once a core banking solution is in place, it does not cost a bank anything to handle additional remittance traffic. It is as irrational to charge for this as it is for telecom service providers to levy roaming charges. Yes, periodically you have to increase server capacity, but that is a capital cost like adding new branch premises. Moreover, after the global financial crisis, banks are being forced to rediscover their main business of lending to small and large enterprises to fuel economic activity, instead of relying overly on other income. This is the 21st century, and technology advances swiftly; it should be used to increase the base of low-cost deposits, not ignored.
