There is a big clamour after State Bank of India (SBI) decided to set a higher minimum balance requirement and penalties for non-compliance. SBI has hiked the minimum balance requirement to Rs 5,000 in metros, while for rural, semi-urban and urban branches, the cut off is set at Rs 1,000, Rs 2,000 and Rs 3,000 respectively. Failure to comply with these rules will attract penalty ranging from Rs 20 to Rs 100. The new rules will come into play beginning 1 April. SBI, being the largest bank and the mascot of India’s public sector character, logically saw its decision to make savings account rules more tight, creating a public uproar.
Those who argue against the move say this will repel customers from parking their money in banks, thus making it detrimental to the creation of a bigger formal economy as envisaged by various initiatives of the Narendra Modi government. Subsequently, there is pressure on the Modi government to nudge SBI to backtrack from the move. It has apparently already done so (read a report here). Most likely, SBI will fall in line eventually as no state-run bank can defy the North Block, particularly since they are at the mercy of the government for capital.
But, before vilifying SBI, one must look at whether there is any merit in the move it made and what is the existing situation in the Indian banking industry, especially, with respect to the rivals of State Bank of India. When one does this analysis, it leaves us with a few compelling reasons that tells us why the current clamour on SBI is somewhat unwarranted and why the government should rather let the bank have its way, else make the same rules apply to all banks ensuring a level playing field.
Consider these points:
First, the SBI rule of minimum balance and penalty for failure of meeting the same does not apply to basic savings accounts or financial inclusion accounts such as PMJDY, better known as Jan Dhan accounts. Hence, there is no question the rules impacting the poorest of the poor and those who are newly introduced to the banking system by way of Jan Dhan accounts. Hence, the argument that the move will deter a large section of basic banking customers from putting their money in the bank doesn’t hold much water. As for other customers, even after the hike, this could still be the lowest charges in the industry.
Second, SBI has every right to operate in a level playing field competing with its private, foreign sector rivals. For long, state-run banks have been treated as extended division of the governments, past and present, and have been forced to operate like a charitable NGO and not like professionally run, commercially viable institutions unlike its aggressive private sector competitors. This situation needs to change for the survival of the banking sector and the same rules should apply to all.
SBI’s private sector rivals such as ICICI Bank, HDFC Bank have had this minimum balance/ penalty on non-compliance requirement for long and in a much higher scale. For instance, according to the ICICI Bank website, the bank has fixed the minimum balance for metro and urban locations at Rs 10,000, semi-urban locations at Rs 5,000 and rural locations at Rs 2,000. It charges Rs 750 per quarter for non-maintenance of minimum monthly average balance.
Similarly, HDFC Bank website says it has a minimum balance requirement for metro / urban branches at Rs 10,000, semi urban branches at Rs 5,000 and rural branches Rs 2,500/- or fixed deposit of Rs 10,000 for minimum 1 year 1 day period. Penalties range from Rs 150 to Rs 600. Now, look at foreign banks.
What about foreign banks? According to HSBC website, The minimum average quarterly balance required to be maintained for HSBC Savings Account is Rs 150,000 and the bank will impose a quarterly service charge of 0.7 percent (plus applicable taxes) of the shortfall of the AQB will be levied for the quarters in which the eligibility criteria is not met. According to Citibank’s rule, a minimum balance requirement for certain category (Suvidha accounts that are no longer salary accounts) accounts is as high as Rs 1,00,000.
Third, like all other banks, SBI too have a cost to maintain its accounts and is fully within its rights to set some rules to recover its cost. The lender opened the maximum number of accounts under the Modi-government’s Jan Dhan programme, but it cannot charge the basic account holders or Jan Dhan account holders to recover the cost since this will repel the new entrants from continuing to use the facility. Somewhere banks need to recover the cost. The question is whether these minimum balance requirements and penalties are more than what it should be. This is where a debate is needed. As of now, as explained earlier, SBI’s minimum balance requirements and the penalties still count the lowest in the industry compared with its peers.
Fourth, the recent decision by banks to impose charges on high value cash transactions beyond a limit is actually in support of the Modi government’s digitalisation move. This will prompt more people to use non-cash methods to transact. It makes no sense to ask banks to repeal those charges citing the reason that it is against the digitalisation drive. But, here, banks’ decision to differentiate between home branch, non-home branch customers is a ridiculous move in the core banking era as this writer pointed out in an earlier column (read here) .
The idea of making these arguments is not to justify SBI rules but to make the point that SBI has every right to operate in a level playing field like its rivals, which is critical for its healthy survival. If these charges are unjustified, two scenarios can happen. Either the customer can choose another bank which offers a better deal. Else, if the government is determined to force SBI to backtrack from its decision on minimum balance rules, it should also ask other banks, which charge way too high, to fall in line too. Same rules should apply to all.
Updated Date: Mar 07, 2017 13:55 PM