Banks seem to have made more money by levying fines than giving loans

Details have come to light about the astonishingly high amounts banks collected as fines from account holders for not maintaining a minimum balance. To put it mildly, this is shocking. Banks have no business to fleece their customers, especially savings bank account holders, for not maintaining minimum balances. Banking is a service that needs to be reasonable, cost effective and efficient in its entire gamut of operations.

There seems to be a basic flaw in designing the charges levied by various foreign, private and state-run banks from customers that have not held minimum balances. The Reserve Bank of India (RBI) cannot remain a mute spectator to this strong arm measure resorted to by banks that appear to employ every mechanism available to shore up their finances, even when the customer is hurt. How else does one explain the State Bank of India (SBI)’s accruals of over Rs 1,771 crore during April-November, 2017 recovered from over 40.9 crore savings bank accounts holders for not having minimum balances? The fact that the bank’s realisation from accounts that failed to maintain minimal balance of Rs 3,000 was half its profits reported during first six months of this fiscal at Rs 3,586 crore is an eye-opener.

The issue of cheque books, free transactions at ATMs or branches cannot be a valid reason for the unreasonable charges levied by banks for not maintaining minimal balances. In any case, after five transactions at bank branches or ATM withdrawals, service charges were being levied exorbitantly. In most cases, the use of debit and credit cards even for purchase of services and products was not free of cost. There is hardly any point in singling out SBI for being unreasonable. A well-researched study put together by Mumbai-based IIT Professor Ashish Das on the subject gives a fair idea of bank charges that were being levied in a non-transparent manner.

Bank charges on shortfall balances are a big maze to delve into and make some sense of. For instance, SBI’s charges on shortfall funds work out to a massive 24.96 per cent on annual penal rate basis. While the Indian Overseas Bank uses what extortionist 159.48 per cent against customers, Yes Bank’s no better at 112.80 per cent. Citibank is lowest on the shortfall charges gradient at 9.48 per cent. Most banks including Oriental Bank of Commerce, Axis Bank, HDFC Bank, Kotak Mahindra Bank, IndusInd Bank, ICICI Bank and Standard Chartered Bank charge anywhere between 24.96 and 159.48 per cent as annual penal rate according to Professor Das’s study. This goes to show that barring a couple of them, even the so-called customers-centric foreign and private sector banks are in no way better or worse than their public sector counterparts. In fact, most banks earnings from these levies were much higher than the interest and business income accrued to them on loans.

As RBI has not fixed any particular rate, minimum balance or time period, the banks seem to have become a law unto themselves, ignoring the finance ministry’s suggestions to prune the charges. Perhaps, it is time RBI and the finance ministry took a serious look at the charges levied by banks against the shortfall in balances. These charges should either be minimal or not levied at all given that banking is a services industry. As Professor Das suggests, perhaps, banks can consider a slab structure given the nature and location of accounts in rural, semi-urban areas and cities. As a norm, these charges should not be more than a fraction of banks’ interest and business earnings and not vice versa. Alternatively, each bank will have to publish its expenses statement on services and free of cost services rendered, if any. No charge, whatsoever, can be arbitrary.

One only hopes that banks are not making up for the losses piled up on large corporate loans through the levy of steep charges on savings bank accounts citing the shortfall in minimum balances.