Making ATM transactions expensive: Is RBI contradicting its own stance?

On Thursday, when the Reserve Bank of India (RBI) permitted banks to charge customers for using other bank ATMs more than thrice a month and that of own-banks more than five times, the apex bank was contradicting its own stated policy stance of encouraging public to alternative banking channels and, then gradually, to paperless banking.

It is the same central bank which in 2011 issued the operational guidelines on implementation of Electronic Benefit Transfer (EBT) and its convergence with Financial Inclusion Plan (FIP)", to give a fillip to financial inclusion. In RBI's own words, that was "part of efforts and lead to a scalable and sustainable financial inclusion model."

To be sure, using ATMs to withdraw cash is not paperless banking but certainly a step towards encouraging customers gradually move to the regime of electronic payments over a period of time.

The primary task for the banking system was to discourage customers from thronging to their branches for simple, basic transactions, and push them to lesser expensive automatic teller machines, and at a later stage to, even cheaper online, mobile banking.

The fact is that Indians, even in metros, are not ready yet to move to completely online and mobile banking, but are surely accepting such models in a gradual manner.

The society, at this stage, is not prepared for fully electronic payments systems. Given that significantly large numbers of dookanwalas and service providers still dealing in cash, even in cities. Cash dispensation is necessary.

But, the system is already getting familiar to life outside bank branches and usage of debit cards. Maximum usage of debit cards happen at ATMs and once people develop comfort in handling with debit cards, they will use it at Point of Sale Terminuses for transactions.

In other words, by suddenly making ATM transactions expensive, the RBI has broken the process of gradual transition to paperless banking and is sending people back to the congested bank branches to withdraw money.

While there is a rationale behind limiting ATM transactions in other bank-ATMs (ATM networks of most banks have improved in metros over years), there is no logic in limiting on bank-ATM transactions.

The government has also been pushing state-owned banks and financial institutions to make payments only through electronic transfers and not through cheques from 1 September 2011.

The larger idea is part of its e-governance initiative to move towards a paperless funds transfer system. The rationale, according to RBI deputy governor, H R Khan, is that for the banks, this approach would be economical proposition as it would reduce paper handling costs.

Even as the central bank is pushing for paperless banking, in some areas there are still disconnects.

For instance, while banks still charge for NEFT and RTGS funds transfer, there are no charges if a person issues a cheque. Thus indirectly pushing customers to use cheques which actually costs more to a bank in terms of clearing processes. The digital system which is faster, cheaper, and more accurate is actually made more expensive for reasons best known to RBI.

Early this year, former financial services secretary, Raiv Takru, had argued in favour of free ATM transactions saying charging ATM transactions could send customers back to bank branches.

"As far as I am concerned I would very much like ATM services to be free. If banks make the services expensive then customers will probably end up at the bank windows. A teller service is far more expensive than ATM service," Takru told reporters after inaugurating the banking technology expo here.

As of now, ATMs are the most used channel of alternative banking transactions.

What RBI has now done, in that sense, is diverting from its own stated policy stance and even taking a step backwards. It should correct the mistake.

Updated Date: Aug 17, 2014 14:54 PM

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