Decoding Cash Withdrawal Fee: Do Private Banks Want Only Millennials as Customers?



If you are the kind who likes to visit his or her bank branch regularly to withdraw or deposit cash, the message from the big three new generation private sector banks (ICICI Bank, HDFC Bank and Axis Bank) is very clear. They do not want you to come visiting their branches. Or at least not very regularly.

Starting March 1, 2017, HDFC Bank, will charge you a minimum of Rs 150 in case you carry out more than four cash transactions (withdrawals as well as deposits) a month in your home branch. In case of Axis Bank and ICICI Bank, the charge has been in effect from early January 2017, when it was re-introduced. While ICICI Bank allows the first four transactions to be free, in case of Axis Bank the limit is set at five transactions.

The move is likely to impact senior citizens and others who are still not used to the idea of withdrawing money from an ATM or carrying out digital transactions using their debit cards, the most.

Also, the banks will charge Rs 5 per Rs 1,000 as a fee in order to allow you to withdraw or deposit cash, once the number of free transactions has been exhausted. This essentially means a charge of 0.5 per cent. This is subject to a minimum charge of Rs 150 for every transaction. Hence, the 0.5 per cent charge actually comes into effect only if you withdraw or deposit more than Rs 30,000 (Rs 150 divided by 0.5 per cent) at one go.

Now what is the logic of having a minimum charge of Rs 150, which is not low by any stretch of imagination? The idea is basically to tell the bank customers to come to the branch only if a substantial amount of cash needs to be withdrawn or deposited, even after the free transactions have been exhausted.

Let’s say you want to withdraw Rs 5,000 from the bank. This would mean paying the bank a charge of Rs 150 or 3 per cent of the withdrawn amount. Hence, it would just make sense to go to the ATM and withdraw the money, free of cost, and not drop-in at the branch.

From the point of view of the bank, this move makes immense sense, given that the cost of servicing a customer at the branch is the highest. A  November 2015 report in The Hindu points out: “On an average, a branch banking transaction costs a bank about Rs 40-50 per customer, while an internet or mobile transaction brings down the costs to Rs 15-30 per customer.”

Also, the move suggests that the new generation private sector banks are only looking for a certain kind of customer, the one who does not want to come to the branch.

As R Gandhi, one of the deputy governors of the Reserve Bank of India had said in an August 2016 speech: “There is a new generation of young people (known as millennials). They have different expectations and their ways of interacting with banks are also different. They prefer not to come to banks for banking services. Rather they would prefer to avail the services through online and social media based platforms.” This is the kind of customer that the new generation private sector banks want.

If you are the kind who likes to visit his bank branch regularly, then you are clearly not welcome at new generation private sector banks. Public sector banks are the place for you.

Post script: Kotak Mahindra Bank, the fourth largest new generation private sector banks, will do the same as the Big three when it comes to cash transactions, from April 1, 2017, onwards. The details can be checked out here.

The column was originally published on Business Standard online on March 3, 2017

SUUTI money belongs to UTI investors and not to the government

unit_trust_of_indiaVivek Kaul 
The Specified Undertaking of Unit Trust of India (SUUTI) has appointed three merchant bankers for the sale of 23.58% stake that it holds in Axis Bank, the third largest private sector bank in the country. As of January 21, 2014, the value of this stake works out to around Rs 13,157 crore. This sale will help the government control its burgeoning fiscal deficit. Fiscal deficit is the difference between what a government earns and what it spends.
But the question is does this money really belong to the government? In order to answer this question we need to go back more than ten years and understand why SUUTI was formed in the first place. By 2001, several assured return schemes as well as Unit Scheme-64 (US-64) of the Unit Trust of India (UTI), were in a mess. The government had to come to the rescue of the investors.
In the wake of the crisis, UTI assured unit holders having 5,000
 or less units that their units would be redeemed any timebetween 1 August 2001 and 31 May 2003. The incentive to hold on was the promise of Rs 12 for every unit worth Rs 10, if it wasredeemed in May 2003. The assets of UTI were divided into UTI-I and UTI-II. The government took responsibility for UTI-I, to which US-64 and all theassured return schemes of UTI were transferred. UTI-I came to be known as SUUTI and UTI-II became UTI Mutual Fund.
SUUTI continued to repurchase units of US-64 even after May 2003. The first 5000 units were bought back at the rate of Rs 12per unit and the remaining at the rate of Rs 10 per unit. Alternatively, investors were offered 6.75% tax-free US-64 bonds maturing in five years, in lieu of their investments.
Of course, the investments that had been made by the assured returns schemes as well as US-64 were transferred to SUUTI. These investments included stocks like Axis Bank (or what was then known as UTI Bank), L&T and ITC.
Now given that the government rescued the investors in the scheme, shouldn’t it be cashing on the shares owned by SUUTI? The argument is not as straight-forward as that. A lot of investors who invested in UTI were essentially retail investors. They parked their hard earned money into the scheme on the understanding that UTI was a government undertaking.
The government, instead of managing the scheme well turned it into a Ponzi scheme. Take the case of US-64, the flagship scheme of UTI. US-64 was launched on July 1, 1964. It was designed to be a balanced fund sort of scheme, which invested both in shares as well as debt securities. But things started to change from 1993, once the government started disinvesting its stakes in public sector enterprises. These shares were offloaded by the government on to UTI and other government owned financial institutions.
In June 1987, debt securities formed nearly 64% of the corpus of the scheme. By June 2000, this had dropped to 26%. Hence, US-64 became an equity scheme from being a balanced scheme. Interestingly, a lot of the investment in equity went into shady companies. US-64 also accumulated a 
lot of investments in the so called K-10 stocks, which were being rigged by Ketan Parekh.
Other than making bad investments, US-64 was also paying dividends way beyond what it could afford. In its first year of operation US-64 had paid a divided of 6.1%. It gradually rose to around 10% by 1979-1980. By 1990-1991 this had gone up to 19.5%. This reached 26% in 1992-93, staying there for the next few years.
With the dividend payouts going up dramatically, the income of the scheme also needed to continually keep going up, in order to ensure that UTI could continue maintaing such high dividend levels. UTI had built up very high reserves as it retained a certain percentage of its income and did not give out its entire income left after accounting for expenses as dividend to the unit holders every year.
So UTI dipped into its reserves to continue paying a dividend of 26%, till 1995-1996 because it did not want to lower its dividends. Over the years the dividends paid out were larger than the income of the unit trust. It made up for the difference by dipping into its reserves. But it soon ran out of reserves as well. The next thing it did was that it started to use the money that the new investors brought into US-64 to pay the dividends.
US-64 thus degenerated into a Ponzi scheme, where money being brought in by the new investors was being used to pay off the older investors. On September 30, 1998, a shocked investing public came to know that the reserves of US-64 had turned negative by Rs 1098 crore. On 28
th February 2001, UTI managed funds amounting to Rs.64,250 crore or more than 13% of themarket capitalization of the Bombay Stock Exchange. It was around this time that some serious bungling seemed to have taken place. UTI accumulated substantial holdings in what came to be known as the K-10 stocks. These were companies in whichleading stockbroker Ketan Parekh had made big investments. While Parekh withdrew from these stocks, UTI continued to holdonto them. In a private placement exercise, UTI picked up 3.45 lakh shares of Cyberspace Infosys at a price of Rs 930 when themarket price was Rs 1100. The price of the stock later fell to Rs.11.
UTI also accumulated significant stakes in unlisted entertainment and media companies, acquired at prices between Rs 250 andRs 500 per share. This again seemed to be an attempt to mirror Ketan Parekh’s strategy. After moving out of K-10 stocks, Parekhtook a fancy for the stocks of unlisted media and entertainment companies. Most of these companies put their Initial Public Offer(IPO) plans on hold, blocking UTI’s exit route.
This was the final nail in the coffin of US-64 and UTI, and the government had to come to its rescue. 
As Dhirendra Kumar writes in a column on “The government supposedly mounted this rescue and gave the poor investors something. However, the fact that the investors lost out was not their fault. These weren’t people who invested in some shady Ponzi scheme. They trusted the Government of India and invested in that magnificent institution called the Unit Trust of India. Effectively, the government ran UTI to the ground, bought back the assets of its victims for a pittance by offering them a Hobson’s choice, and is now ready to make a killing by selling off those assets when the equity markets are much higher.”
Given this, the profits that the government is now likely to make by getting SUUTI to sell the stake that it holds in Axis Bank, actually belongs to the investors of the assured return schemes and US-64 of UTI.

The article originally appeared on on January 22, 2014
(Vivek Kaul is a writer. He tweets @kaul_vivek)

10 things the Cobrapost sting tells us

king cobra

Vivek Kaul

Stings in India till now have been carried out to expose politicians. The Cobrapost sting is the first sting that has brought into the public domain the murky way in which the big Indian private banks operate. But more than just exposing the murky way in which big banks operate, the sting brings out in the open other uncomfortable truths as well.

1. The finance minister P Chidambaram in his recent budget speech had said “There are 42,800 persons – let me repeat, only 42,800 persons – who admitted to a taxable income exceeding Rs 1 crore per year.” Of course no one took that number seriously. We now know why.
The Cobrapost sting clearly shows us that there are many more people with a taxable income of more than Rs 1 crore. The straightforward and more than helpful way in which the banks were ready to help invest the black money of the ‘supposed’ politician that the Cobrapost reporter was fronting for, can only tell us one thing: Banks seem to be doing this regularly.
And given this we can only conclude that there are many people out there with taxable incomes of more than Rs 1 crore, who don’t pay tax, than just 42,800. While it’s an obvious conclusion that did not need this visual evidence, but it is still an important conclusion nonetheless.
2. The second thing that the sting tells us is that those who have black money do not keep all of it under their mattresses. A lot of it as we know goes into buying real estate (largely benami). But the holders of black money seem to like to diversify their hoarded “wealth”. As the Cobrapost press release points out “(Banks) accept huge amounts of cash and invest it in insurance products and gold.” The money invested in insurance products is in turn invested in stocks, government securities and financial securities issued by corporations. So hoarders of black money do seem to be following the age old investing principle of “don’t put all your eggs in one basket”. They seem to be buying everything. From gold. To real estate. To stocks. And even have money in fixed deposits with banks.
3. By investing at least in gold and fixed deposits, hoarders of black money also show us that they like to have some liquidity in the assets that they own. Real estate is not terribly liquid and neither are insurance policies.
4. The sting also shows our love for gold which goes with the large amount of black money in this country. Very small amounts of gold can be used to store a large amount of black money as wealth. India has lot of gold because Indians love it is the normal claim that is made, but India also has a lot of gold because there is a lot of black money floating around.
5. The good bit is that instead of just lying around under the mattresses of people, some of the black money is coming into the financial system. When people buy insurance policies which in turn buy either debt securities issued by the government or the private sector or invest in shares issued by a company getting listed on the stock exchange, they are in some way financing someone who needs the money. That is the ultimate job of any financial system. To move money from those who have it, to those who need it. Now what proportion of the total black money comes into the financial system, that no one has any clue off. But its better than people just channelising all their black money into land and other forms of real estate. Also as more of this money comes into the financial system the greater are its chances of being detected.
6. The other interesting thing is that banks are helping channelise black money into insurance and not mutual funds. The main reason for this is the fact that insurance companies pay a much higher commission than mutual funds do, even though mutual funds remain a much superior mode of investing. It also goes with the cross selling that banks tend to do these days given that almost all of them own insurance companies. So if you have ever wondered why the moment you enter a bank they try to sell you all kind of insurance policies and not attend to the need you really went there for, you now know the answer.
7. Another major reason for banks selling insurance and not mutual funds to this set of clientèle who wants to put its black money to work is the fact that the know your customer (KYC) norms for mutual funds are much stronger than those required to invest in insurance. This is clearly an anomaly that needs to be done away with. Either mutual fund KYC norms need to be weakened or insurance KYC norms need to be strengthened. If it was not for these KYC norms, mutual funds remain a better way of hoarding black money given that they are very liquid. You can buy a mutual fund today and sell out tomorrow (unless you are buying a tax saving mutual fund that comes with a lock-in of three years). The same is not possible in case of insurance which comes in with a minimum lock-in of five years. Hence, mutual funds also need to be provided equal access to black money as insurance has. Also someone who has a lot of black money and is wealthy, doesn’t really need to pay for the “pure” insurance that compulsorily comes with the investment oriented insurance plans.
8. The sting also tells us that banks have double standards. If you are ready to deposit/invest a lot of money with/through them, then they are more than ready to lay out the red carpet for you. If you are not, then try changing your address once and wait for all the proofs they want. Or try asking for a locker, and wait for the bank clerk/relationship manager to tell you that you will also have to open a fixed deposit of a few lakhs to get a locker. Meanwhile as the Cobrapost press release points banks “ allot lockers for the safekeeping of the illegitimate cash, including special large size lockers to accommodate crores of hard cash.” Or try depositing money and the bank clerk will give you a nasty look for having to count the total amount of money you are depositing. Whereas if you have black money, the bank will come to your residence to collect it. As the Cobrapost press release points out the bank will “personally come to the residence of the client to take the black money deal forward and collect the cash, even bring along counting machine.” Wow.
9. What the sting also tells us is that how simple it is to create a fake identity in this country. The rapist Bitti Mohanty could do it. So can you if you have black money. And the banks will help you with it. As the Cobrapost press release points out “ICICI Bank officials were ready to make a suitable profile for the client, such as showing him as an agriculturist or engaged in some business, so as to make the investment unquestionable. On the other hand, Axis Bank officials proved to be a notch above in inventing fraudulent means. Use “sundry” accounts of the bank, they suggested, to deposit all the illegal cash from where it is to be routed into investment. Either use accounts of other customers, for a fee, to transfer money abroad, or use some shell company and take away a chunk of foreign currency as expenses toward business-cum-leisure trips.”
10. And to conclude, what the sting clearly tells us is that everybody who pays Income Tax in this country is basically an idiot who is being taken for a royal ride. If you have a lot of black money and you are not paying tax on it, chances are somebody out there is waiting for you with a red carpet.
Please go find him.

The < a href="">article originally appeared on on March 14, 2013 

(Vivek Kaul is a writer. He tweets @kaul_vivek)