Massive inconsistencies found in bank service charges across India

There are massive disparities in service charges among Indian banks, reveals a study. Among the scheduled commercial banks (SCBs) surveyed, only three came out on top (Category A) regarding the various service charges applied to basic savings bank accounts.

These are IDFC First Bank, AU Small Finance Bank and Bandhan Bank. IDFC First Bank has 14 services where its charges are exceptionally low or zero. Next in terms of low charges is AU SF Bank, which does not charge for mandatory SMS alerts, charges less for online IMPS compared to at-branch IMPS and has a comparatively lower requirement for average monthly balance. Bandhan Bank is the only bank apart from State Bank of India (SBI) with zero average monthly or quarterly balance requirements.

The study, "Benchmarking Reasonableness of Service Charges by Banks in India", authored by Dr Ashish Das from the Indian Institute of Technology - Bombay (IIT-B), and commissioned by Moneylife Foundation under a CSR initiative was released by SS Mundra, former Deputy Governor of Reserve Bank of India (RBI).

Canara Bank and Axis Bank charge the highest, putting them in the lowest category (Category D). Canara Bank ranked lowest in the study for its extremely high service charges for services like 'DD cancellation', 'self-generation of ATM PIN', 'mandatory-SMS alerts' and 'non-maintenance of average balance' in rural areas. Axis Bank has relatively higher charges, with a few outlier charges for 'non-maintenance of balance' in metro and urban accounts, 'non-financial transactions from own bank ATMs' and 'failed Standing Instruction'.

Among public sector banks (PSBs), State Bank of India emerged as the best, but is still in the B-category. The scrapping of the controversial average quarterly balance (AQB) worked in SBI's favour.

Talking to Bizz Buzz on the sidelines of the event, SS Mundra, former Deputy Governor of RBI, said, “Apart from bank service charges, lot of works needed to be done by the regulator in areas like credit and third party distribution of products. Particularly, in the area of third party distribution, more in the area of insurance product selling, mis-selling was happening, which has to be curbed.” Mundra also said that portability of bank account facility must be launched by the banks. If it happened, it will help bank customers in a great way.

Pradeep Natarajan, who has recently been appointed as the whole time director of IDFC First Bank, said, “At the bank, we do conduct ‘near and dear one’ test before launching any product.”

Senior journalist Sucheta Dalal, who is founder trustee of Moneylife Foundation said, "We have presented this study to the RBI Governor and his top team and we are told that the report is being examined by the regulator.”

The Depositor Education & Awareness (DEA) Fund of RBI has plenty of resources to set up this comparative dashboard, if there is a will. It is up to us to make it happen, she added.

Until 1999, RBI prescribed what banks could charge for various services. Since then, banks have been allowed to set their own service charges, but RBI has emphasised that bank charges should be reasonable and linked to costs. A report by RBI nearly two decades ago (in September 2006) laid the foundation for discussions on ensuring the reasonableness of bank charges identifying certain services as being fundamental to banking operations. However, there has been no detailed research on whether the principle of 'reasonableness' mandated by RBI is being followed by banks.

There was a preliminary investigation by IIT-Bombay (in 2009) and RBI's Department of Banking Supervision conducted a thematic analysis (2020-21). These are unpublished and not in the public domain. Hence, no comparison or ranking is available and bank customers remain in the dark about the reasonableness of banking charges, resulting in a lack of transparency and accountability.

However, Prof Das says despite these efforts, the question of reasonableness of basic banking service charges remains a pressing concern, particularly in light of the significant transformations within the banking sector over the past 18 years.

"In this context, I am grateful for the opportunity to present the findings from the detailed analysis of bank service charges in India and shed light on regulatory and supervisory actions in this domain. The report emphasises the need for a thorough assessment, justification and adherence to regulatory guidelines in fixing service charges. The report provides three case studies that are eye-openers," he added.

The study exposes inconsistencies in adherence to RBI mandates; some banks impose charges that exceed reasonable limits, according to service charge data obtained for a sample of 23 scheduled commercial banks (SCBs) and two cooperative banks.

The study says that while private sector banks tend to impose higher average minimum balance requirements, public sector banks (PSBs) exhibit higher average charges across various services. Some banks that impose extremely high service charges include YES Bank (for 'cheque returned due to technical reasons'), Federal Bank (for doorstep banking'), Standard Chartered and Indian Overseas Bank (for 'non-financial Off-Us ATM transactions') and Canara Bank (for 'DD cancellation' and 'self-generation of ATM PIN'). Off-Us refers to transactions done at ATMs and POS terminals of other banks.

Wide disparities in ATM withdrawal charges are evident among banks; some banks adhere to the caps set by RBI, while others charge below or above these thresholds. Additionally, inconsistencies persist in charges for services such as NEFT/RTGS. Central Bank of India, Bank of Maharashtra, Bank of India and IDBI Bank, contrary to RBI advice, have failed to pass on branch-based NEFT/RTGS service charge benefits to customers.

Many banks impose penalties for ATM/POS declines due to insufficient balance, with charges reaching as high as Rs 25. Out of the 25 banks in the sample, 11 do not charge for POS declines (but charge for ATM declines) while 5 do not charge for both. The study raises questions about the rationale for such charges, particularly since failed transactions do not inflict any cost (the normal interchange charge) on the bank.

Despite the declining significance of debit cards domestically, a majority of banks continue to impose annual fees. Of the 25 banks in the sample, 16 banks do not charge for debit card issuance, while all banks, except IDFC First Bank, impose debit card annual fees. The study advocates a review of the reasonableness of these fees, especially taking into account the large number of instances where cards remain unused.

RBI has mandated SMS alerts for debit transactions done through UPI/NEFT/RTGS/IMPS and ATM cash withdrawals. Such SMS alerts become part of the product features of the withdrawal channels. Yet, some banks levy charges for mandatory SMS alerts. Ten out of the 25 banks do not charge for the mandatory-SMS alerts, and among the 15 banks that impose these charges, five do not have a monthly/quarterly cap on such SMS alert charges.

The study reveals inconsistencies in penal charges imposed by banks for non-maintenance of minimum balance, with some banks applying disproportionately higher charges. There are 14 banks having a slab structure wherein, for each slab, the penal charges are constant in rupee terms, i.e., they are not a fixed percentage of the shortfall even within each slab. These banks impose a disproportionately higher penal charge in the lower slab of shortfalls than in the higher slabs.