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

rupee

 

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The idea is basically to tell the bank customers to come to the branch only if a substantial amount of cash needs to be withdrawn or deposited, even after the free transactions have been exhausted.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 This would mean paying the bank a charge of Rs 150 or 3 per cent of the withdrawn amount.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

Cut Interest Rates by 2 per cent: The New Economics of Nirmala Sitharaman

Nirmala Sitharaman Spokesperson 11, Ashoka Road, New Delhi - 110001.

BA Kiya Hai, MA Kiya,
Lagta Hai Wo Bhi Aiwen Kiya.
– Gulzar in Mere Apne

The commerce and industry minister Nirmala Sitharaman wants the Reserve Bank of India(RBI) to cut the repo rate by 200 basis points.

Yes, you read that right!

200 basis points!

The repo rate is the rate at which banks borrow from the RBI on an overnight basis. One basis point is one hundredth of a percentage. The repo rate currently stands at 6.5 per cent.

I still hold that the cost of credit in India is high. Undoubtedly, particularly MSMEs which create a lot of jobs contribute to exports… are all hard pressed for money and for them, approaching a bank is no solution because of the prevailing rate of interest. I have no hesitation to say, yes 200 bps, I would strongly recommend,” Sitharam told the press yesterday in New Delhi.

What Sitharaman was basically saying is that India’s micro and small and medium enterprises(MSMEs) are not approaching banks for loans because interest rates are too high. Given this, the RBI should cut the repo rate by 200 basis points and in the process usher in lower interest rates for MSMEs.

This, according to Sitharaman, was important because MSMEs create a lot of jobs and contribute to exports, and hence, should be able to borrow at a lower interest rates, than they currently are. As per the National Manufacturing Policy of 2011, the small and medium enterprises contribute 45 per cent of the manufacturing output and 40 per cent of total exports.

Hence, Sitharaman was batting for the MSMEs. But is it as easy as that?

That politicians don’t understand economics, or at least pretend not to understand it, is a given. But Sitharaman is a post graduate in economics from the Jawaharlal Nehru University in Delhi. (You can check it out here). For her, to make such an illogical remark, is rather surprising.

Not that the RBI is going to oblige her, but for a moment let’s assume that it does, and cuts the repo rate by 200 basis points, in the next monetary policy statement, which is scheduled for October 4, 2016, or over the next few statements.

What is going to happen next? Will banks cut their lending rates by 200 basis points? Only, when the banks cut their lending rates by 200 basis points, is the MSME sector going to benefit.

Banks only borrow a small portion of money from the RBI on an overnight basis and pay the repo rate as interest. A major portion of the money that they lend is borrowed in the form of fixed deposits. Hence, lending rates cannot fall by 200 basis points, unless fixed deposit interest rates fall by at least 200 basis points. (I use the word at least because banks tend to cut deposit rates faster than lending rates).

Wil the banks cut deposit rates by 200 basis points? Let’s assume that they do. If the deposit rates are cut by such a huge amount at one go, people will not save money in fixed deposits. Money will move into post office savings schemes, which offer a significantly higher rate of interest in comparison to fixed deposits (which they do even now, but with a cut the difference will be substantial).

Over a longer period of time, money will also move into real estate and gold, as people start looking for a better rate of return, higher than the prevailing inflation. This will lead to the financial savings of the nation as a whole falling. And banks in order to ensure that deposits keep coming in, will have to reverse the 200 basis points cut and start raising interest rates.

This is precisely how things played out between 2009 and 2013, when household financial savings fell from 12 per cent of the GDP to a little over 7 per cent of the GDP. Meanwhile, the interest rates went up, in order to attract financial savings.

This is Economics 101, which a post graduate in economics from a premier university in the country, should be able to understand.

Another important issue that our politicians seem to forget, over and over again, is the importance of fixed deposits, as a mode of saving, in an average Indian’s life. In 2013-2014, the latest year for which data is available, 69.23 per cent of total household financial savings, were in deposits.

Of this nearly 62.02 per cent was with scheduled commercial banks and 4.19 per cent with cooperative banks and societies. Nearly 2.61 per cent was invested in deposits of non-banking companies.

What does this tell us? It tells us that for the average Indian, the fixed deposit is an important form of saving. For the retirees it is an important form of regular income. Now what happens if fixed deposit interest rates are cut by 200 basis points? The regular income from the fresh money that retirees invest, will come down dramatically. Also, when their old fixed deposits mature, they will have to be invested at a significantly lower rate of interest.

This means that they will have to limit their consumption in order to ensure that they meet their needs from the lower monthly income that their fixed deposits are generating.

What about those who use fixed deposits as a form of saving? (I know that fixed deposits are a terribly inefficient way of saving, but that is really not the point here). Those who are using fixed deposits to save money, for their retirement, for the education and wedding of their children, will now have to save more money, in order to ensure that they are able to create the corpus that they are aiming at. This will also mean lower consumption.

Ultimately lower consumption will impact MSMEs as well, because there won’t be enough buyers for what they produce, as people consume less.

Those individuals who are not in a position to save the extra amount in order to make up for lower interest rates, will end up with a lower corpus in the years to come.

The point being that MSMEs do not operate in isolation. And the level of interest rates impacts the entire economy and not just the MSMEs, as Sitharaman would like us to believe.

Further, even if fixed deposit rates fall by 200 basis points, banks may still not be able to offer low interest rates to MSMEs, simply because they need to charge a credit risk premium i.e. factor in the riskiness of the loan that they are maing.

In case of the State Bank of India, the gross non-performing assets of SMEs stands at 7.82 per cent, as on March 31, 2016. This means that for every Rs 100 that the bank has lent to an SME, close to Rs 8 has been defaulted on. This risk of default needs to incorporated in the interest rate that is being charged.

And finally, the interest rates on fixed deposits of greater than one year are currently in the region of 7 to 7.5 per cent. This is when the rate of inflation has already crossed 6 per cent. In July 2016, the rate of inflation as measured by the consumer price index was at 6.07 per cent.

If fixed deposit rates are cut by 200 basis points, the interest rates will fall to around 5 to 5.5 per cent. This when the rate of inflation is greater than 6 per cent. This would mean that the real rate of interest (the difference between the nominal rate and the rate of inflation) would be in a negative territory. This is precisely how things had played out between 2009 and 2013 and look at the mess it ended up creating for the Indian economy.

Given these reasons, it is best to say that Sitharaman’s prescription would be disastrous for the Indian economy.

The column originally appeared in Vivek Kaul’s Diary on August 25, 2016