Bank proposes no minimum balance penalty

May increase costs for customers, say bankers

 

Customers might not be required to pay for non-maintenance of a minimum balance in a bank but could have to pay additional charges for use of other services in such cases, such as an account statement or ATM withdrawals or cheque book issuance.

In its bi-monthly monetary policy review on Tuesday, the Reserve Bank of India (RBI) said instead of penal charges for non-maintenance of a minimum balance in ordinary savings bank accounts, banks should limit the services available on such accounts, to those available to basic accounts.

While the decision on penalty removal is yet to be finalised, senior bankers said this would mean an increase in the charges paid by customers for transactions of all kinds. Further, RBI said banks should restore the services when the balances improve to the minimum required level.

Aditya Puri, managing director, HDFC Bank, said: "The consumer will end up paying more in the alternative. Let us say the minimum balance is Rs 10,000 and we earn four per cent on it. For Rs 400, we give you cheque books for the full year, ATM transactions, we give you the account balance and the statements. Break-even for the bank to provide those services is Rs 30,000. If you have consumer interest in mind, you will not push this because the alternative is, then you are charged for these services. If I start charging you for these, you will end up paying more. It is implied that if you don't charge on non-maintenance of minimum balance, you are authorised to charge on the transaction."

However, this proposal is still under consideration. Puri explained this was a suggestion by RBI and the Indian Banks' Association will explain its viewpoint to the regulator.

He noted a bank was also there to make a profit, not give free service. "This is a cost. To break even, to provide you the services, I actually need a minimum balance of Rs 20,000," he said.

K R Kamath, chairman and managing director, Punjab National Bank, said for a basic account, the clear instructions are that you cannot charge for not maintaining the balance. He said the direction is to have an entire set of accounts where it is defined that they wont be charged for non-maintenance of balance but would only be entitled to certain services.

Soumya Kanti Ghosh, chief economic advisor — economic research department, State Bank of India (SBI), said, “It will be a decision by individual banks how they take the decision of non–maintenance of minimum balance. Since the policy suggests that the banks should limit the services to such accounts, so, if that is the case, there is a possibility that there is a re-look at the charges for things such as charges for number of ATM transactions etc. The RBI still needs to clarify what it means by limit services.”

Rupa Rege Nitsure, chief economist, Bank of Baroda, said a penalty for non-maintenance of a minimum balance was more relevant from the viewpoint of private sector and foreign banks, which charge a huge penalty or even make accounts defunct if a customer did not maintain a minimum balance. “If we want more people to use banking facilities and talk about financial inclusion, one cannot be so harsh on customers,” she said.

According to the head of retail operations of a public sector bank, these charges are levied to recover the operational costs incurred by banks for maintaining the accounts. "Even if there is just Rs 100 in such accounts, in our books it is still an account and we have to maintain it. There is no benefit except paying the minimum four per cent interest. Following computerisation, the cost for maintaining such accounts has come down but still it is an expense for banks. The penalty was intended to gradually weed out such accounts,'' he said.

The central bank also said that in the interest of their consumers, banks should  consider allowing their borrowers the possibility of pre-paying floating rate term loans without any penalty.

“If borrowers have taken a floating rate loan from banks and if they pre-pay, banks are at a loss as it reduces the asset size. However, from a recovery standpoint, pre-payment is a positive thing. Pre-payment is not such a harsh action that the banks need to penalise the customers. Penal action will reduce the loan appetite of borrowers for loans. Thus, removal of penalty is an important step from the point of view of financial inclusion,'' says Nitsure.

Banks offer floating rate loans to some segments like the MSME (micro small and medium enterprises) sector. However, in case of retail loans, only home loans have floating rate, in which case the pre-payment penalty has already been abolished. All other retail loans like car loans and personal loans are fixed rate loans.

The banking regulator said that banks should also limit the liability of customers in electronic banking transactions in cases where banks are not able to prove customer negligence.