Costs have shot up 22% between 2004-05 and 2011-12

The cost of banking services rose a sharp 22.1 per cent between 2004-05 and 2011-12, with customers paying more on everything from ATM transactions to making deposits. The rise was driven primarily by higher fees for accepting deposits and giving loans and advances, called intermediation services.

While the cost of these intermediation services shot up 26.7 per cent during the eight-year period, fees imposed on direct banking services such as issue of demand drafts, cheque and bill collection, foreign exchange services, bank guarantee and ATM transactions rose by just 5.3 per cent, according to a new experimental index put together by the Economic Advisor’s Office, attached to the Ministry of Commerce and Industry.

An analysis of the index reveals that intermediation services have a greater contribution to the overall rise or fall of banking costs. This is on account of the larger proportion of bank revenues generated from these activities. As such, intermediation services have been allocated a higher weight of 78.58 per cent in the index.

The costs of banking services have been increasing from 2004-05 up to 2008-09, when they declined. This is explained by the global economic recession. Thereafter, the prices moved up gradually again, surpassing previous levels in 2009-10 and 2010-11, before they slid in 2011-12.

In the case of direct banking services, however, the trend has been different. Direct banking service costs rose from 2004-05 onward till 2008-09. But in 2009-10, they fell by 5.9 per cent and have been on the decline since.

The cost of banking services fell by 3.3 per cent in 2011-12 after rising in the previous two years. This was primarily on account of reduced fees levied by banks on accepting deposits and giving loans and advances, which declined by nearly 4 per cent year-on-year, according to the Economic Advisor’s Office.

There was also a reduction in the cost of direct banking services. However, the cost of these services only declined by 0.4 per cent, as per an experimental banking services price index put together by the Economic Advisor’s Office.

Data for the indices were compiled by the RBI on the basis of responses from 21 banks, of which 13 were in the public sector, four were private, two were foreign banks, one was a cooperative bank and one was a regional rural bank.

arvind.jayaram@thehindu.co.in

(This article was published on September 13, 2012)
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