Thursday, November 6, 2014

RBI allows reduction of 'free' ATM transactions - Shocking Disregard for Depositors' Welfare

Photo from Wikimedia Commons
Reserve Bank of India, the Indian Banking regulator is often praised for being a tough regulator whose strict policy formulations ensured discipline amongst the Indian banks and managed to (atleast to a significant extent) shield the Indian banking system from the financial crisis in 2008.

However, looking after the banking system from a macro perspective is not the only role of the Reserve Bank of India. Its very own website states that the  Department of Banking Operations and Development is responsible for regulation of commercial banks, which is ‘aimed at protecting depositors’ interests’.

However, if you look at the recent notification (RBI/2014-15/179 DPSS.CO.PD.No. 316/02.10.002/2014-2015) titled “Usage of ATMs – Rationalisation of number of free transactions” it would seem as if the RBI is forgetting its role with respect to protection of consumer interests.

Get charged for own-ATM transactions
Previously the position was that ATM transactions at ATMs other than the card issuing bank’s own, were charged beyond the limit of 5 free transactions a month.

However, the new notification allows banks to charge a transaction fee (capped at Rs. 20) for every transaction beyond the free limit of 5 transactions even for use of its ATM cards at its own ATMs!

This is atrocious and defeats the purpose of having ATM machines in the first place. The advantage of having ATM machines was that individuals could withdraw cash as and when needed. This meant that many people, especially students are in the habit of making several (much more than five) withdrawals every month with each one being of small amounts such as Rs. 100-1000. Such a habit was convenient since one could avoid the risk and hassle of carrying large amounts of cash and at the same time one could continue to earn interest since the money was left with the bank and not in the wallet.

Only 3 free transactions at other bank ATMs
The new notification allows banks to restrict their customers’ usage of other bank ATMs to just 3 free transactions every month for transaction in Mumbai, New Delhi, Chennai, Kolkata, Bengaluru and Hyderabad (at other locations banks must allow for 5 free transactions). In theses cities on every transaction beyond the third one on other bank ATMs, a transaction fee can be levied.

No distinction between financial and non-financial transactions
Furthermore, the counting towards the free transactions includes “non financial” transactions such as balance enquiry and a ministatement. It is not clear whether the change of the ATM PIN shall be considered as a non financial transaction counted towards the limit of 5 free transactions. If they are so considered, it shall be a major step backward for security since it shall act as a disincentive for changing PIN frequently. People would rather save their free transactions for withdrawals than change of PIN.

Banks given discretion and hence, the poor and middle class bears the brunt
The said RBI regulation is not mandatory and imposition of charges has been left to the discretion of the banks. This means that the banks can choose to let the present practice of unlimited free transactions on the home network ATMs continue unabated, or they can impose chares beyond five free transactions. Similarly they may allow more than three or even unlimited free transactions at other bank ATMs.

As of now SBI has already started charging for more than 5 withdrawals on SBI’s own network of ATMs while the other banks are pondering on what to do. However, a more sinister practice which is already in place and is likely to be extended is that the customers with premium accounts, with high AQBs (Average Quarterly Balance) i.e. the well off customers with fat bank balances are allowed to have unlimited withdrawals at even other bank ATMs while ordinary account holders are charged for transactions beyond the free limit. This practice by the private banks and a few of the PSUs is likely to be extended by allowing more than 5 free home network transactions to the premium customers (rich guys) while the ordinary folks have to pay for every transaction beyond the free limit.

Such discriminatory policies which work against the interests of the small depositors is exactly the sort of evil that RBI, the regulator is supposed to prohibit in order to safeguard the depositor’s interests. Indian banks have managed to perform well enough and have earned profits as well for the past several years of providing unlimited free own-bank transactions and five free other bank transactions every month and hence the Indian Banks’ Association’s argument regarding the significant costs of providing such service deserves to be treated with skepticism. Even if there are costs, I am sure that the banks are entirely capable of absorbing them without a hiccup as they have been doing for the past few years.

I hope the RBI shows regard for the depositors interests and withdraws this notification soon.

Do comment and let me know regarding your views regarding this....

1 comment:

  1. I think this move is made to curb cash transactions. While the purpose is genuine, this could have been approached in some other way. For example, in US, the ATM machines yield only $20 currency notes. This prompts one to use plastic money wherever possible & use cash only at mom n pop stores.


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