'Subsidise fee of individual bank account holders'

A working group set up by the Reserve Bank of India (RBI) has recommended cross-subsidising of basic banking services to individuals and salvage the unrecovered costs through higher charges to corporates.

This is the key recommendation of the working group constituted by the Reserve Bank of India (RBI) earlier this year for formulating a scheme for ensuring reasonableness of bank charges for services rendered to individual customers.

"The working group recognised that the innate nature of the basic services calls for a positive bias in pricing, with an element of cross subsidy where required. The positive bias would involve only a concession and not a full waiver of the charges," the report stated.

The group's recommendation is that banks will levy charges for basic services to individuals at rates which are lower than the rates applied when the same services are given to non-individual (corporate) entities.

The group observed that the minimum balance requirement for an account, especially in technology-intensive banks, is a pricing mechanism for a bundled product "� account and services "� aimed at recovering the base cost of acquiring an account and conducting core account maintenance tasks, and the cost of a set of services given to the customer without any charge.

The report said the methodology of arriving at charges carries clearly some negative features. The methodology creates a barrier to a customer with a limited need.

"When a customer wants only a savings account and not any other service, he will have to pay a price for both the accounts and the services or move onto another bank which offers only the account," it pointed out.

The group examined certain items of service for which the charges are levied as per the value of the transaction (ad valorem). The banks indicated that since the operational risk involved in providing the service goes up as the value of the transaction goes up, the charges are also levied accordingly.

The group opined above a certain value, the charges cannot rise in proportion to the value of the transaction. Recognising this, even now, the system of placing a cap for the charges levied ad-valorem is followed by some banks. Accordingly, ad-valorem charges would need to be subjected to a cap.

The report granted banks' contention that handling cash transactions are costlier compared to the same transactions put through on the basis of cheques or other instruments.

"Therefore, a transaction involving handling of large amount in cash will impose additional costs on the bank. Such a cash intensive transaction will include a service and will be open to levy of a charge," it said.

The group, however, said as far as basic services and deposits into savings accounts are concerned, the question of any charge for handling cash for these will not arise, since these transactions are not cash intensive.