Relief for consumers as RBI scraps minimum balance penalty-Business Standard 01.04.2014
Instead of levying penal charges, banks should limit services available on such accounts, RBI said
Your account has been debited Rs 750 for non-maintenance of minimum balance for the quarter ended March'
Are you one of those who usually get this SMS (short messaging service) from your bank for failure to maintain the stipulated minimum balance in your savings account? If so, there could be some respite coming your way.
While reviewing the Monetary Policy on Tuesday, Reserve Bank of India (RBI) governor, Raghuram Rajan, has suggested that as a part of consumer protection under financial inclusion, banks should not levy charges for non-maintenance of minimum balance.
"Banks should also not take undue advantage of customer difficulty or inattention. Instead of levying penal charges for non-maintenance of minimum balance in ordinary savings bank accounts, banks should limit services available on such accounts to those available to Basic Savings Bank Deposit Accounts and restore the services when the balances improve to the minimum required level," the RBI said.
"Banks should not levy penal charges for non-maintenance of minimum balances in any inoperative account. Banks should also limit the liability of customers in electronic banking transactions in cases where banks are not able to prove customer negligence," the central bank added.
Measures announced on Tuesday also propose to frame comprehensive consumer protection regulations based on domestic experience and global best practices. In the interest of their consumers, the policy also suggests that banks should consider allowing their borrowers the possibility of prepaying floating rate term loans without any penalty.
Impact
While the measures may bring cheer and some relief to consumers, the move is marginally negative for banks, experts suggest.
Says Abheek Barua, Chief Economist and Senior Vice President, HDFC Bank: "The RBI is trying to do away with what they think are distortions in the banking system. For instance, they want to do away with the minimum balance penalty, but also penalty on pre-payment of floating rate loans etc. For the banks, of course, it is a bit of a problem because banks need that float."
"Minimum balances ensure that there is a minimum amount of funding which is available in the bank for the transaction that the customer does and the cost bank bears for it. So, in a way, it's a compensating thing. The move is marginally negative for banks. Though the amount of hit will not be large, it will certainly affect our revenues in some way and we'll have to adjust our cost efficiencies accordingly," he adds.
Adds Rupa Rege Nitsure, chief economist, Bank of Baroda: "These are very simple measures, taken from the perspective of customer protection and retention. If borrowers have taken a floating rate loan from banks and if they pre-pay, banks are at a loss as it reduces the asset size. However, from a recovery standpoint, pre-payment is a positive thing. Pre-payment is not such a harsh action that the banks need to penalise the customers. Penal action will reduce the loan appetite of borrowers for loans. Thus, removal of penalty is an important step from the point of view of financial inclusion.
"Penalty for non-maintenance of minimum balance is more relevant from the view point of private sector and foreign banks that charge huge penalty or even make accounts defunct in case the customer does not maintain the minimum balance. So, if we want more people to use banking facilities and talk about financial inclusion, one cannot be so harsh on them," she says.
So, should you now look at pre-paying your loan given the RBI's proposals and the outlook for interest rates?
Says Gaurav Mashruwala, a certified financial planner: "For me, irrespective of the benefit, one should always look to pre-pay loans. Even if there is a penalty, the penalty rate will always be less than the rate of interest the bank is charging on the loan disbursed. For instance, for Rs 40-lakh loan outstanding that a customer has, either he continues to pay a high interest of 10 - 11% or pre-pay it by paying 2-3% penalty."
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