Indian banks must share digital dividend

Indian banks continue to be in the news for all the wrong reasons. A representative body of nine bank unions has called for a day-long all-India strike today to protest banking reforms.

Bad loans, a perpetual thorn in the performance of the sector, have become a topic of national debate because a famous businessman fled the country to distant shores. Earlier this year, the RBI revealed that banks had written off nearly ₹52,000 crore in just 2015 alone.

To counter loan losses and increased employee costs, banks are resorting to a time-bound tactic. They are quietly raising fees on everyday transactions while also imposing massive new commissions on transactions whose marginal costs are miniscule. 

Thanks to the RBI, India’s banking backbone is secure and world-class.

When India’s banks first launched the NEFT payment system in 2009, banks in the US had still not begun to offer person-to-person payments to their customers. Bank of America, Wells Fargo and Citibank introduced a competing product only in the summer of 2012, but transactions were initially limited to account holders of these banks — a restriction unthinkable to Indians.

India’s banks, by using the SMS infrastructure for simple but mandated security steps such as communicating one-time-passwords (OTP) and sending confirmations to phones after each ATM/credit card transaction so that issues of fraud can be immediately raised, have earned muted global recognition.

Billions of transactions are now completed each month as database updates in electronic ledgers of large banking systems. Banks have saved thousands of crores in paper-based transaction, storage, retrieval and employee costs.

So automated is Indian banking that bank employees will have never come into physical contact with lakhs of customers or their accounts, for months even, with back-office systems doing all the work painlessly.

Rather than pass these savings back to consumers, banks are doing the opposite. They are charging for the very electronic transactions that have saved them money by customers’ rapid adoption of online and mobile services, reducing foot traffic into bank branches. India is alone among the world’s nations in penalising consumers’ use of banking technology.

Today, banks routinely charge fees for outward and inbound NEFTs of up to ₹10 per transaction. In America, ACH interbank fees are free. SBI charges a whopping ₹172 per year for its debit/ATM card when studies have shown that ATMs have enormously reduced bank costs compared to transaction costs at the teller window.

In America, ATM cards fees are largely free. Some banks charge ₹30 a quarter to send out the very SMS messages that they mandate (for OTPs, for example) as a condition of online banking. SMS messages sent by American banks are free.

And then there are the commissions. A railway booking on IRCTC triggers a convenience fee not only from IRCTC (never mind that it is the Indian Railways which also significantly benefits from IRCTC bookings) but a ₹10 bank commission on each IRCTC transaction. American banks, as a rule, do not charge consumers for e-commerce transactions.

From the time of the Egyptians, banks have made money on interest spreads, the difference between rates charged to debtors and those paid to depositors. Banks, of course, used to earn fee revenue on specific services — such as locker rentals, stop-payment requests of cheques and issues of demand notes — and these were deemed fair because they affected only a select subset of customers that requested those services.

But as banks’ loan losses soar and employee demands continue to skyrocket, transaction fees are creeping up to foot the bill. This despite the fact that banking spreads in India are among the highest in the world.

According to the World Bank, interest rate spreads for all types of loans were just 0.8 per cent for Japan, 1.8 per cent in New Zealand and 2.9 per cent in China. In India, 4.5 per cent spreads are common.

One has to look into bank annual reports to see what a big revenue maker fees have become for the big banks.

In a research note last year, Suruchi Jain, Morningstar’s equity research analyst wrote that SBI’s transaction fees, in Q2 2015, went up a whopping 48 per cent year-over-year as the bank increased service charges for its retail clients.

She observed that transaction fees alone accounted for 25 per cent of all fees generated by the bank. It is a serious story that has been largely missed by the financial press.

Meanwhile, the hapless consumer shrugs it off as an annoyance because these fees appear as electronic entries which muffle the impact of the bite.

The RBI is in a precarious position given its mandate to not only implement monetary policy but also to ensure that the banking sector is healthy.

It has little control over labour negotiations and banks’ operational costs related to bad loans. It is relieved that bank balance sheets look healthier as a result of these fees but it is concerned for consumers with little recourse in the law to help.

The time has come for the Government to create the equivalent of the US Consumer Financial Protection Bureau, a government agency that makes sure that banks, lenders, and other financial companies treat consumers fairly.

Without it, there is nothing stopping banks from exploiting consumers even more.

The writer is the managing director of Rao Advisors LLC

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