SB a/c balance slip-ups invite 78% p.a. penalty

MUMBAI, JANUARY 1:  

Banks may come under regulatory scrutiny for imposing disproportionate penal charges on customers for shortfall in maintenance of minimum balance in savings bank accounts.

Most banks have fixed penal charges for non-maintenance of minimum balance in SB accounts at an average rate of 6.5 per cent of every month’s shortfall, which is equivalent to a penal rate of 78 per cent per annum, according to a study, ‘Fault lines in Implementation of Minimum Balance Rule’, by Ashish Das, Professor, Department of Mathematics, IIT Bombay.

“This high rate of penalty appears to have no correlation with the costs for arranging such funds at, say, the call money market rate,” said Das.

“Thus it raises question of efficacy of regulation B (whereby it should be ensured that such penal charges are reasonable and not out of line with the average cost of providing the services) of the RBI’s guidelines on levy of charges for non-maintenance of minimum balance in savings bank account,” he said.

Multiple slabs

Underscoring that banks have set multiple slabs of shortfalls and overall the charges are not a fixed percentage of the shortfall, the study said the percentage usually decreases with an increase in shortfall.

The charges may be reasonable in absolute terms but not in relative terms, given that the RBI has defined what, in relative terms, is reasonable, the study elaborated.

In other words, banks have introduced slabs in a manner that vitiates the principle of charges being a fixed percentage of shortfall (under the RBI’s proportionality rule, whereby penal charges should be directly proportionate to the extent of shortfall observed).

“One could have cared less if the banks’ approach had not been on penalising more, in percentage terms, the accounts with smaller shortfalls than the ones with larger shortfalls, thereby leading to accounts with smaller shortfalls cross-subsidising the accounts having larger shortfalls,” said Das.

The study established that most of the banks, in violation to the ‘rule of unbiasedness’ set by the RBI, impose a disproportionately high penal charge in the lower slab of shortfalls than in the higher slab of shortfalls. In this process, the banks thrust undue discrimination in the form of cross-subsidisation for no fault of a vast section of depositors.

Das reasoned that a shortfall in minimum balance maintenance by a savings account depositor can be considered akin to an overdraft facility taken by a customer. The only difference is the credit risk associated with the overdraft.

Since there is no credit risk in shortfall funds, there is no rationale for its cost to exceed the cost of overdraft funds (which was 6-14 per cent per annum as on March 2016, since when interest rates have come down significantly).

“Contrastingly, on the other extreme, the loans through credit cards carry a rate of around 40 per cent per annum. If the cost of highly risky credit card-based funds is 40 per cent per annum, can the cost of zero-risk funds (shortfall in customers’ savings deposit funds) be more than that,” said Das.

Recommendations

Given the extant regulation on minimum balance in savings accounts, the study observed that RBI may like to ensure its compliance not only in letter but also in spirit.

The penal charge rule is not to facilitate adjustments by banks based on their analysis of the distribution of shortfalls and net amount of revenue expected, thereby creating a situation of cross-subsidisation.

The study recommended that the RBI’s enforcement department should be pro-active in checking such situations, which affect the gullible masses directly.

Further, the central bank’s consumer education and protection department needs to pitch-in to protect depositors and educate them about the correct regulation.