It is not the banks job to make cash transactions costlier…..

Dr KC Chakrabarty never minced words even at the cost of being sidelined. He was the only RBI senior official who questioned the demonetisation exercise right at the start before others joined in much later. He actually had the courage to say that demonetisation idea came during his time as well to RBI but was sidelined and not even taken to the Board. All other officials told us things which was better left to analysts .

Anyways, he has recently written a useful piece on the recent rises in transaction charges in Indian banking.

 Over the last month, leading banks in India have announced charges on cash transactions made at branches beyond a particular frequency in a month. The State Bank of India has also raised the monthly average balance requirement with a penalty for not maintaining a minimum balance in accounts. Pricing of bank services is an issue which requires logic and transparency. It also needs to be fair to both the bank and the customer, and needs to be addressed as six inter-connected issues.

The six issues are:

  • The Principle Of A Charge On Cash Transactions
  • Why Are Banks Levying This Charge?
  • Calculating How Much To Charge
  • Who Acts To Check These Practices?
  • A Flat Fee Is Unfair To The Poor
  • Charging For Not Maintaining Minimum Balance: Is This Fair?

 On banks charging you for cash he says let government come with a law:

A customer may make any transaction through paper, digitally, or cash, and that remains the customer’s choice. Any charges a bank levies must be based solely on its costs, and its margins. Taking that point further, in a cost-based pricing system, the fifth transaction made within the same month via an ATM should be cheaper than the fifth transaction at the same branch. Similarly, cash-handling charges should vary according to denomination of notes. Such charges should also be levied based on the number of pieces of notes, rather than the number of times a customer visits the branch.

If it is done as per government directives – to cut down the volume of cash transactions – then the government needs to create a facilitating framework by passing on the cost of production and distribution of cash notes on to the public through banks. But this can be done only after creating a legal framework approved by Parliament for this purpose. In any way, it cannot be the function of the bank to dictate to the customers not to carry out cash transactions by increasing the charges. And anyways, cash transactions cannot be reduced in the system by introducing arbitrary charges on them.

He sums up the several issues:

The pricing of products and services by financial intermediaries has a critical role in increasing the economy’s growth rate, and making it more inclusive. Irrational, non-transparent, discriminatory, and excessive pricing of products of financial services makes the financial intermediation, and payment and settlement system operationally inefficient. This, in turn, adversely affects the productivity and efficiency of the real sectors of the economy. Hence, issues of pricing of banking and financial services can no longer be pushed under the carpet. We need to have a healthy debate across a large cross-section of society on all the issues discussed above, and create a strong regulatory and legal framework for consumer protection, while evolving rational, transparent and non-discriminatory pricing system for financial services. This will accelerate the growth process and reduce the income inequality prevalent in our society.


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