Closing your account? Beware of the banker’s revenge

Navi-Mumbai resident Suresh Sadagopan, a certified financial planner who also happens to be a regular columnist for this newspaper, had a current account with a public sector bank since September 2008.

Exactly a year later, he felt this account was redundant and went to the branch to close it.
After completing the procedure, when he saw the account balance amount that was to be transferred to him, he discovered it was Rs550 less than the amount in his account. He
immediately questioned the bank official about the missing Rs550. The official simply told him, “This is a standard charge.”

“He blamed it on the software, saying that the figure was given out by the software. For the balance amount cheque that was given as a banker’s cheque, the bank slapped another Rs 44,” says Sadagopan.

A banker’s cheque is one where the money is paid out of the bank’s funds and not from a person’s account. When Sadagopan asked him why these charges were levied, he was told that the Rs44 for the banker’s cheque could be waived, but not the Rs 550. Later, he learnt through his friend that the bank levied a charge for closing an account within a year of opening it. Service tax and education cess of total 10.30% was also charged, taking the amount to Rs550.

The irony here is that Sadagopan had decided to close exactly on the 365th day, which means he completed a year. The official, had he been aware, could have told Sadagopan that if he closed the account a day later, he could save some money — the bank states on its website that if the account was to be closed after a year, it charges Rs250.

DNA Money decided to check whether all banks charged for closing an account. Much to our surprise, almost all banks charge between Rs100 and Rs1,200 for closing an account between 6-12 months from opening it. But are these charges justified, given that a customer is only demanding his own money back and not asking for any other service?
Bankers say they levy charges because opening an account requires them to complete certain procedures, for which they incur costs.

Sujatha V Kumar, vice president - marketing and communications at Royal bank of Scotland (RBS, erstwhile ABN Amro Bank) says, “The bank incurs significant costs for each account opened, including providing services which are not charged, such as cheque books, setting up of internet access, welcome kits familiarising the client with the account and the bank, etc. Costs are also incurred in planning future investments assuming that an account opened would remain active with the bank for a certain period of time.”

She adds: “Services being rendered for an account do not cease at the time of account closure, but continue thereafter as well in cases like handling cheques being presented even after an account is closed, etc. Therefore, when an account is closed before a reasonable period (taken as 6 months or 12 months, depending on nature of the account), the bank is constrained to levy a charge in order to recover costs incurred on such accounts.”

RBS charges Rs250 to Rs500, depending on the type of the account and the period during which the account holder used it.

Other banks say such charges are levied to ensure that customers don’t just open an account for one of two transaction and then close it.

K V S Manian, group head - liabilities and branch banking at Kotak Mahindra Bank, says, “We need to ensure that the customer is a serious customer, who genuinely needs an account. If the account remains for 2-3 months then it is risky for banks as it is not known whether the account was opened for some particular (fraudulent) transaction. Quick opening and closing of an account is a cost and also has a risk of fraud.”

There is also the cost of acquisition — the expenses that banks have to incur on attracting a customer to open an account with them.

“An account costs money. When a customer opens an account, we send the welcome kit, a card. There are costs involved in acquiring the customer, sending the kit and setting up the system. Whatever is charged to the customer, the bank incurs costs higher than that,” Manian says.

But when banks themselves set up marketing desks and booths at various places to lure customers into opening free of cost no-frills account — sometimes for people who already deal with one or more banks, are these charges then justified?

HSBC India said it could not comment on the charges. A spokesperson for HDFC Bank was not available for comment, while ICICI Bank did not respond to the question posed on why these charges were levied. The bank sent a response stating, “We don’t charge our customers if the account is closed within 30 days or after a year. A charge is levied on the customer if the account closure takes place during 31 days to one year.”

With effect from September, 1999, the Reserve Bank has granted freedom to banks to prescribe service charges with the approval of the respective board of directors. However, according to the ‘Reserve Bank’s Instructions on Banking Matters’ issued in 2007, “For basic services rendered to individuals, banks should levy charges only if the charges are just and supported by reason.”

In the same year, former RBI governor Y V Reddy, had said in Delhi: “Closing of account does not require a big effort... You can just close it, what’s the problem? I can understand to say that for opening an account there is an effort, but for closing an account, how can they charge? It has been decided we would issue a circular that no charges should be levied on closure of account even if the existing contract provides for a charge on closing the account... They stand withdrawn.”

Till date, no such circular has been issued by the RBI, during Reddy’s tenure or after that, when current governor D Subbarao took over. The Banking Codes and Standards Board of India (BCSBI), prescribes a code of commitment for its member banks, which gives out instructions on the way customers should be treated.

The Code of Bank’s Commitment to Customers that is to be followed by BCSBI member banks (presently 79 plus) just states, “If you decide to close your current/ savings account, we will close your account within three working days of receiving your instructions.”

But the following statement in the code can come to the rescue of people who are closing an account because they are not happy with the bank’s service. “If you are not happy about your choice of current/ savings account, within 14 days of making your first payment into the account, we will help you switch to another of our accounts or we will give your money back with any interest it may have earned. We will ignore any notice period and any extra charges,” states the code.

BCSBI chairman K J Udeshi was not available for comments, but another official at BCSBI told DNA Money, “There are specified charges. BCSBI tells banks to be transparent about the charges. We see whether they had included account closure fee in the tariff charges and whether they are communicating the same to the account holders while opening the account. Now you are questioning the quantum of the fee. So we will have to examine it.”