Five-star banks and the gentle art of fleecing

For most us, savings bank accounts are an illusory haven that evokes mixed emotions. At the beginning of every month, an SMS or a mail alert on salary credit makes you happy. Then, the middle-class smugness slowly fades out as the month progresses. Home loan, auto loan, personal loan, credit card payments and the monthly top-ups, there is a flood of debit alerts. We watch in distress how the account balance slips below the minimum prescribed by the bank. The last one week is a long wait for the next salary credit. And the life, solely dedicated to equated monthly installments (EMIs), goes on in a vicious circle.

The most spectacular thing about savings accounts is that you hardly get to see hard cash. One salary credit and subsequent debits are just digital entries in your account. The government insists that everyone should go digital and be happy with e-transactions. Yes, it makes an ideal world.

But banks, the new-age Shylocks, are spinning money at the expense of customers. Every service rendered by the bank is priced ridiculously high. It is the public money that banks feed on, but they are shamelessly charging customers (read owners) even when they deposit or withdraw through branches and ATMs. There are heavy penalties if you don’t maintain monthly average balance (MAB).

The earlier practice of quarterly average has now paved way for a much steeper MAB system. Penalty for not maintaining MAB in a private sector bank is anywhere between Rs 450 to Rs 750 per month, while for SBI, it is Rs 20 to Rs 100, says SBI’s chairman. Some banks have fixed the minimum MAB at Rs 10,000.

HDFC Bank’s MD Aditya Puri is right when he says his bank is not a free enterprise, and that customers must pay for his services. Of course, you don’t go to Oberoi Hotel and ask for Mahesh Lunch Home rates. But banks run on money borrowed from the public shouldn’t charge five-star rates to manage their money.

In the greed for higher Net Interest Margin (NIM) – which is the difference between total interest earned and total interest paid, are bankers losing their way? NIM for Indian banks, hovering at around 3%, is much higher than many developed economies, which typically have a very low NIM ranging between 0.5 to 1.5%.

Where does banks’ higher NIM come from? For every Rs 10,000 in savings account, 4% is kept aside as Cash Reserve Ratio. So the remaining Rs 9,600 is available to lend, and at an average lending rate of 10%, the bank earns Rs 960 in interest. Even if the bank pays as much as 4% interest to the customer, bank earns more than Rs 500, even with statutory reserves. Isn't it sufficient for banks to run operations without levying cash/ATM/cheque handling charges?

For credit cards, banks levy as much as 35-40% interest rate. With various surcharges and fine, customer may end up paying more than 60% interest. Personal loans are expensive at more than 12-13%. Home loans are slightly cheaper, when you avail it, but banks trick gullible customers into paying higher interest rate, for a long period.

It is time for the Reserve Bank of India (RBI) to act. Like how Base Rate helps banks, can we have a cap on lending rates and charges to safeguard customers’ interests?