Who pays the banks?

Disclaimer: I work for IDBI Bank, but the views expressed in this article are purely my own and are not related to IDBI Bank in any way. The use of SBI or any other bank in this article is purely for illustrative purposes and is not intended to malign its reputation.

Post demonetization, banks have been flush with cash and it has helped them shore up their business remarkably. It was no surprise that it allowed them to start adopting measures which would have otherwise faced wide-spread public scorn and would have to be reversed. One of those measures was the slashing of interest rates on savings deposits. SBI (followed by several other banks) reduced this rate to 3.5% (from 4%) for deposits up to Rs 1 Crore. This rate had remained constant since 2011, despite the de-regulation by RBI of Savings bank interest rates. What’s interesting to note, however, is that the rate was kept at 4% for deposits higher than Rs 1 Crore.

The other measure introduced by SBI (and other banks) was the charge for not maintaining minimum balance. A move that earned SBI, Rs 1,771 Crore just for the period of April-November 2017.  This amount actually surpassed the bank’s second quarter net profit of Rs 1,581.55 crore. SBI drew a lot of flak for this from media outlets that alleged that this amount was collected mainly from the poorest customers, who couldn’t even manage to maintain their bank balance, and had to pay penalty on top of that. This prompted Former SBI chairperson Arundhati Bhattacharya to declare – “No account of any poor man is ever charged”.

Snapshot of article about Arundhati's refutation of media claims about min balance charge

Snapshot of article about Arundhati’s refutation of media claims about min balance charge.

In both of the cases mentioned above, we need to ask ourselves – when banks introduce measures directed at increasing profits, who pays for it? We should particularly like to examine Arundhati’s claim that the poor man is never charged.

Let us first look at the slashing of savings deposit interest rates. The rationale offered by SBI (and other banks) was – “The decline in the rate of inflation and high real interest rates are the primary considerations warranting a revision in the rate of interest on savings bank deposits”. Banks want to give you just enough interest as will attract you to keep your money with them. They don’t want to give you any more or any less. The ‘real interest’ being talked about here is the interest you get after adjusting for retail inflation. As inflation dropped, this interest increased (since savings deposit interest was constant at 4%) and it was no longer in the banks’ interest (pun intended) to keep this value inflated and give the customer more than is needed to retain them. Hence, the cut.

But then, why was the rate retained at 4% for deposits more than Rs 1 Crore? I suppose that is because deposits more than Rs 1 Crore are harder to get and the bank must do what it can, to retain them. Thus, for the bank, the cost of retaining the heavy deposits by paying more interest is outweighed by the benefit they bring in by making available large sums of money to the bank, which it can then use to lend. Hence, the lollipop for big customers.

An interesting argument put forward in favour of this move is that it was accompanied by a major cut in the Marginal Cost of Lending Rate (MCLR), used to calculate interest rates for loans. Thus, even though savings accounts holders got less interest, it was offset because they also had to pay less interest on loans. The question however, is how many savings account holders avail such loans? How many of them are on floating rates that would benefit from such cuts? I’d wager they are very few in number. Out of the 90% of customers who were affected by these rate cuts, more than half wouldn’t even be eligible for a loan from the very bank that holds their deposits. Out of the rest, very few ever venture to take loans, depending instead on old Fixed Deposits and savings to pay for their purchases. It’s mainly businessmen, especially those doing well, who benefited from this cut in MCLR. But we can safely say that it was financed by giving less to the poorest customers of the banks, including the Sabka Savings Zero Balance Account or Basic Savings Bank Deposit (BSBD) Account Holders, who Arundhati was talking about.

Coming now to the penalty for not maintaining minimum balance. Even a cursory look at how it is implemented will leave you convinced that it is fairly arbitrary and a kind of a tax on those who are unable to save money for themselves. Yes, it’s as bad as it sounds. Even though this penalty is not charged on BSBD Accounts (exclusively marketed for poor people), it is still charged to those who really don’t have money to keep in the bank. In my experience, the majority of people who end up paying this charge are either those who don’t even know that there is such a charge or those who do, but are helpless in the face of it because they simply can’t afford to keep their money in banks. Anybody who is even moderately well off and has Rs 3000 to spare (current min balance limit in Metro Cities for SBI), can easily avoid paying this charge by parking that in their account. So, those who eventually pay this charge are the ones who actually don’t have even Rs 3000 to keep in their accounts. Imagine how many such unfortunate people must’ve contributed to SBI’s earnings in order to make it greater than even their net profit.

Some people might say that if one cannot afford to keep minimum balance, why don’t they open BSBD Accounts and avoid the penalty? Well, there are very good reasons not to open such accounts. Since these accounts are mandated by the government, banks try to discourage people from opening them by placing ridiculous restrictions on them.

Most Important Terms & Conditions - The Customer cannot have any other Savings Bank Account, if he/she has a Basic Savings Bank Deposit Account. If the customer already has a Savings Bank Account, the same will have to be closed within 30 days of opening a Basic Savings Bank Deposit Account. Maximum 4 withdrawals in a month, including ATM withdrawals at own and other Bank's ATMs and transactions through other mode including RTGS/NEFT/Clearing/Branch cash withdrawal/transfer/internet debits/standing instructions/EMI, etc. No further customer debits would be allowed during the month.

Snapshot of Terms and Conditions for BSBD Accounts in SBI, taken from their website on 1st Feb 2018.

In SBI, one of these is the following – maximum 4 withdrawals in a month, including ATM withdrawals at own and other Bank’s ATMs and transactions through other mode including RTGS/NEFT/Clearing/Branch cash withdrawal/transfer/internet debits/standing instructions/EMI, etc. No further customer debits would be allowed during the month.

That means, once you have made 4 debits to your account (by any transaction), your account will be frozen for the rest of the month. The only way to remove such a freeze is to convert your BSBD account into a normal savings account. Imagine your account accessible to you only 4 times a month, with literally no way of increasing this arbitrary limit.

Since banks don’t make any money out of these accounts, they make it really hard for people to operate them. That way, fewer people sign up for them. In fact, a common refrain is that such accounts are liable to be frozen, so customers should sign up at their own risk. Thus, even though BSBD Account holders are not paying money to the banks, they are paying by losing the convenience of easy access to their money – something we take for granted.

I think just these two examples are enough to understand who is paying the banks, and I haven’t even looked at how loan recovery is done! Perhaps next time, we shall see how banks recover sums as low as Rs 10 from retail customers, while loans as big as Rs 1000 Crore get written off their books.

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3 comments

  1. I don’t know about any of these details, but two interesting questions/points spring to mind:

    1) Banks must obviously make most of their profits from wealthier individuals.
    2. If banks don’t make money from less wealthy individuals, there is no incentive for them to provide a service. So perhaps a government-funded bank could step in and provide this service instead? Or could the government pay the banks to provide a free service to less wealthy customers (or course, everyone will say no to this)? Or is it just a fact of life that people have to pay for a service?

    Like

    1. The banks mentioned here are actually government funded banks, not the private ones 😁

      There is already a mandate for banks to provide free service to poor customers, but they make it really difficult for them to use those services.. see the last few paragraphs of my post.

      Banks do make money on the backs of the wealthier customers. They are the ones who provide the bulk of the cash that the banks then lend out. However, in India, the volume of bad loans is really huge. Almost 15% of the loans given out by government owned banks in India have gone bad (and this is after all the accounting magic, experts estimate higher real numbers). But the banks can’t refuse to the rich people access to their money, or they’d be sued like hell. How do they recover this money then? By making clean profits by charging poorer customers on the basis of arbitrary rules like minimum balance.

      If we go by logic, 100 bucks from a poor person will fetch the same value and interest as 100 bucks from a richer one. The poorer person who doesn’t have even minimum balance in their account is also not going to use the services as frequently as a richer customer. Thus, poorer customers, though not contributing much to the banks books, are also not demanding service from them (that banks have to spend money to provide). The cost is thus offset. Why then, does the bank penalize the poor customer? Because any such penalty is pure profit for the bank.

      Like

  2. “Why then, does the bank penalize the poor customer?”
    You answered the question yourself – banks don’t make any money out of these accounts.

    Seems like this government-funded bank is behaving exactly like a private bank, and therefore has no reason to exist.

    Like

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