Today banks levy all kind of charges and penalties to bank depositors and account holders without any rhyme or reason. Are these charges justified?

You withdraw your own deposit before the due date and you pay a penalty. You maintain a lower balance in your savings bank (SB) account and you pay a penalty. You withdraw your own money from ATMs of other banks beyond five times in a month and you pay a penalty. You do not operate your account for more than one year, you pay a penalty. You operate your account beyond a stipulated number of times, you pay a penalty.

There are umpteen areas where penalty is levied in the form of variety of charges for the mistake you have committed by opening an account with a bank, who is courting you till you open the account. And you pay a penalty even for closing the account. It is difficult to keep track of the multiple methods in which your account gets debited by your bank and you have no choice but to silently suffer because these charges are all mentioned in some corner of their website, which you had confirmed having read without reading it because you had signed on the dotted lines when you opened the account. In fact you are lending money to the bank by keeping your funds with it which helps the bank to earn profits by relending your money to trade, commerce and industry. Therefore, are these penalties or charges, by whatever name it is called, justified? Does it not tantamount to cutting the hand that feeds you?

The Reserve Bank of India (RBI) has, after much deliberations and delay, finally relented and advised banks not to levy pre-payment penalties on home loans foreclosed before their due dates, that too in respect of only loans carrying floating rates. They are yet to consider waiver of pre-payment penalty on fixed rate loans, though its own offspring, the National Housing Bank has waived on all type of loans.

A few days back, the finance minister in his parting gift to the banking public had asked the banks to provide electronic transfer of funds from one bank to another free of all charges. But as the saying goes in Kannada, "Devaru Kottru Pujari Bida" meaning "God wants to give but the priest is coming in the way", a RBI official has firmly declined to accede to the wishes of the FM as he feels that free electronic fund transfer is not viable for the banks. We can, however, empathize with the RBI official, because the officials of RBI generally do not have the practical experience of retail banking and consequently he may not know the nitty-gritty of branch banking. Banking has undergone a metamorphosis and with the introduction of core banking solutions, technology plays a major role in the functioning of branches, thereby saving substantial cost of operations for the banks. And to consider that it is not economical to offer e-transfer facility free of charges is in variance with reality.
                    
The fact that computerization has benefitted banks immensely can be gauzed from the following statistics released by RBI in its publication: Profile of Banks 2010-11.

It can be seen from the above table that since the introduction of core banking solutions in banks, the productivity of employees has improved considerably during the last five years, and so has the profit per employee, while the wages as a percentage of total expenses have remained almost stagnant despite the revision in wages of all employees in 2010-11. This marked improvement has been possible due to the computerization of banks, which has helped in improving the business handled by the branches without commensurate increase in manpower.

The benefits thus accrued to banks due to introduction of technology have not been passed on to the customers, as the charges and penalties have gone up over the years, instead of coming down.

Looking from the angle of rationality, too, certain penalties and charges currently levied on the bank depositors are not justified and by abolishing these penalties the banks can veritably increase their business by leaps and bounds.

Let us analyse the case of penalty levied on deposits withdrawn before maturity from the following example:

You keep a deposit for five years carrying interest say at 10% per annum. At the end of two years you decide to prematurely encash the deposit and as per the present rules the bank will pay you interest for these two years at the rate applicable for a two-year deposit, that is say at 8%. Obviously you lose 2% interest because you have withdrawn the deposit earlier than the scheduled due date and the bank will recover this 2% from you while paying the deposit amount. In addition to this loss of 2%, if you are charged a penalty of 1%; it only amounts to double benefit for the bank and double loss for the depositor. As the saying in a vernacular language goes, "the banks want to eat with both the hands."  Is this justified?

One of the barometers of the strength of the bank is the level of asset liability mismatch position, if any, of each bank. By keeping the deposits initially for a longer period the customer is in fact helping the bank to reduce its mismatch in its asset liability position for the first two years in the above example, The banks should be grateful to the customer who keeps the deposit for longer periods, though a microscopic minority may withdraw their deposits prematurely, which from all angles benefits the bank rather than the customer.

Now let us examine the subject of withdrawing cash from ATMs. At present the RBI has mandated that banks should not levy any charge for using the ATMs for the first five transactions from another bank's ATM. The more the usage of ATMs, better it is for the banks for the following reasons:

1.    The banks will save considerably on paper work and manpower cost, if more and more transactions are carried through ATMs. It is estimated by the finance ministry that the cost of handling a cheque during it entire lifecycle comes to around Rs25 to Rs40 per cheque, if it is handled at the counter of a branch. This expenditure is saved, if the customer uses an ATM instead of withdrawing through the mechanism of a cheque.

2.    Manual dispensing of cash at the bank counters is always fraught with the risk of excess payment, which is totally avoided, if ATMs are used by the customers.

3.    In our country, on an average, every middle-class family would keep cash in their homes to the extent of at least Rs25000 to meet an emergency. This money hoarded at home would come into the coffers of banks, if the customers are assured of withdrawing cash from the ATMs liberally any number of times without any charges. It would enhance the savings deposits of banks, giving them the much needed low cost deposits, if ATM withdrawals are made totally free.    
                                                      
4.    At present we have nearly one lakh ATMs in our country. It is expected that we will have more than two lakh ATMs within the next three years with the introduction of white label ATMs in the course of next one year. These ATMs will not remain idle if bank customers are allowed  withdrawal from ATMs free of cost any number of times and thus enable better utilization of these ATMs which otherwise would be a dead investment.                                                                     
I would, therefore, rather go a step further and advocate that in the interest of better utilization of the large investments made in ATMs and with a view to bring down the cost of branch operations, it is not only imperative to waive all charges for using ATMs but also for every transaction done through ATMs customers should be offered incentives either by way of cash back or through the reward system on the lines of what is prevalent in the credit card industry.

This will give a boost to the CASA (current account-savings account) deposits of banks, helping the banks to improve their profitability, which in turn will improve their capital adequacy ratios as well.

Now coming to the controversial subject of electronic remittance of funds through the National Electronic Funds Transfer (NEFT) facility from one bank to another, the finance ministry has called upon banks to waive charges up to Rs1 lakh per transaction for very valid reasons. There is a need to reduce paper-based remittances not only to save cost but also the environment. The ministry has also said that any loss of revenue can be made up through higher savings on the cost of cheques, besides saving on time and energy of the operating staff. The cheque system is also susceptible to frauds, which can be totally avoided by e-transfer.

The UK monetary authorities have already taken a policy decision to consign the cheques to dustbin of history and have advised the banks to completely change over to electronic transfer of funds within a stipulated time frame and stop issuing of cheque books thereafter. Though it may be too premature for us to emulate them now, it is necessary to incentivize bank customers to move with the times and mover over to the new system of electronic transfer by abolishing all charges and making it simpler and smoother for safe movement of funds from one account to another.

Heeding the advice of the finance minister, a couple of public sector banks have since announced waiver of charges for National Electronic Funds transfer (NEFT) facility up to Rs1 lakh and the RBI should take a cue from this and direct all the banks to not only follow suit, but make all e-transactions free of all charges and penalties in the interest of banking public, economy and the country as a whole.

We can go on and on to justify that many of the charges levied by the banks today are neither fair nor equitable. The fact of the matter is that more than 40% of our population does not have bank accounts, and still many people in the villages are reluctant to open a bank account for fear of losing their savings by the hefty charges levied by banks. The government is pushing the banks to go to villages for making available banking services to the hitherto unbanked areas for financial inclusion. But unless and until the RBI and the banks take a bold and progressive step of waiving most, if not all, of the charges and penalties on bank depositors, the plans of inclusive banking will remain a distant dream. On the other hand, if the RBI and the banking fraternity make up their mind and change the way in which banking is conducted today, we can possibly achieve a new realm of ecstasy in banking that can certainly be called Utopian.  

During the last days of Lehman Brothers in September 2009, BBC quoted Craig Warner, noted British screenwriter, who said: "If you talk to 100 people, 102 will tell you they hate bankers." Let us change this in India to say that if you ask 100 people at least 75 if not 100 will tell you that they love bankers. This is possible if and only if what is said above is put into practice.

 (The author is a banking analyst. He writes for Moneylife under a pen-name 'Gurpur')