The Minimum Balance Sham

Balance Sham

“A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.”

– Anonymous/Mark Twain/Robert Frost

On Tuesday, 13th March, SBI announced a reduction in the minimum balance charges that the bank levies on customers that don’t meet the minimum requirement. The reduction in charges range from 66% up to 75% depending on the customer’s location and shortfall amount.

Not very long ago, in 2017, SBI had reintroduced its non-maintenance of minimum balance charges after almost five years. The minimum balance charge was a common practice in banks for a very long time. This was looked at as an avenue to have a basic minimum amount locked in the system to ensure greater stability in bank activity. While a few public-sector banks decided to discontinue it with a push for financial inclusion by the government, the private sector banks continued to have steep minimum balance requirements and charges. While the markets rallied on the reintroduction of this charge expecting higher revenues, customers are suffering.

Banks have been increasingly resorting to gaining revenue from charges such as ATM usage, non-maintenance of minimum balance, etc. to help boost the bottom line. Banks are a necessity in today’s world. Most of the important transactions happen through banks such as payment of salaries, receiving pension, etc. Given its monopolistic situation, banks tend to exploit this position in numerous ways. Such charges have been put into place in order to increase the bottom line of the banks without accruing too much cost. It is literally a way of making exploitative pure profits.

Let us look at the figures to get some context and understanding. From April – November 2017, SBI collected Rs 1,771 crore from non-maintenance of minimum balance charges. This is almost 50% of the profit made by the bank in the first two quarters (Rs. 3587 crores). If one were to look at the profit made by the bank in the three quarters of the financial year, the revenue from the charge is over 100% (The bank made a net profit of Rs. 1170.1).

The minimum balance charge is one of the worst atrocities that banks perpetrate on their customers. Why is this statement being made? To understand this, let us look at who is the charge being incurred by? Someone who doesn’t maintain the minimum balance. And who doesn’t maintain the minimum balance? Someone who doesn’t have money. If a person did, it would be there!

The scheme runs deeper. The guidelines outlined by RBI state a percentage to be charged in proportion to the short fall. Banks have instead been levying a flat rate with slabs. While these amounts seem reasonable given they are small, their percentage amount of the shortfall is significantly high. Especially when we look at it at an annual level, it is significantly high. Let us consider the above example to make things clearer. Under the previous operational framework, a metro/urban account holder needed to have a minimum balance of Rs. 3000. A charge of Rs. 50 + tax would apply if the balance was less than 75% of the prescribed amount. If the account has less than 75% of the amount, say Rs. 700, for a year. The account would attract a charge of Rs. 600 + tax. That is about 85% of the balance without tax! It would cross over 90% if the tax were included. This figure exceed 100% in the case of other banks.

The very principle on which this revenue stream is founded is based on profiting from another’s loss. In a modern society, governments and regulators have been evaluating their actions based on the principles of welfare economics. Things such as externality and pareto-optimality are often tossed around. This by no way is a pareto-optimal improvement. A pareto-optimal improvement is an improvement where one-party gains without anyone else losing. This revenue stream relies on the loss of the customer. Not only does it rely on the loss, it goes one step further and creates an incentive structure where banks look for more such avenues and want more customers to default. The very limit of Rs. 3000 most certainly wouldn’t have been arrived at arbitrarily.

The logic could be taken further. The very reason that this revenue stream is necessary is because the banks and their investors are not satisfied with the revenue from the normal activities of the bank (lending). With the large amounts of NPAs and scams coming out, the requirement to boost revenue from such sources are at some level to cover up the inadequacies and inefficiencies in the functioning of the bank. The best outcome would be where this charge doesn’t exist. However, the next best alternative is where the guidelines are carried out in letter and spirit rather than looking at it as a legal way of increasing revenue by looting people.

– Contributed by Bhargav

Picture Credits: Reuters

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