Beginning March 1, India’s top three private banks — ICICI Bank, HDFC Bank and Axis Bank — have started charging customers a transaction fee for cash withdrawals and deposits at their branches. Customers will now have to pay a minimum of Rs 150 for every additional cash transaction at the branch after the first four transactions, which are free. India’s largest bank, the State Bank of India, is also set to charge customers Rs 50 for cash deposits beyond three such transactions in a month. The move to impose charges has been justified by these banks as a measure to promote digital payments in alignment with the government’s broader push to nudge more people to migrate to electronic forms of fund transfer and reduce the extent of cash: A digital economy is expected to further tax compliance and, in turn, higher revenues. The move comes at a time when the latest RBI data shows a month-on-month decline in electronic transactions in the months of February and January.
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It begs the question if forcing people to switch to digital forms of payment through fiat or by levying steep charges is an optimal solution in an economy, where the use of cash is still widespread and with a large unbanked population and informal sector. What is being lost sight of by bankers is the fact that banking is a privileged business where regulators allow a limited number of entities after making sure that they are the ones customers can trust. This was the basis of the RBI’s decision to ask some of the top private banks in India to retract their decision to impose costs on customers for ATM withdrawals a decade ago — the rule has been modified since with caps on number of free withdrawals.
One of the accepted principles of good regulation is proportionality, or weighing the costs to customers against the perceived benefits, of a proposed move. No such rationale has been offered so far making it imperative for the regulator — in this case the RBI — to direct these banks to reconsider their move. A competitive financial system does have its benefits, but surely there is merit in a public policy which dictates that banks ought to also fulfill some of the aspirational needs of the country. The RBI, whose mandate also extends to customer protection, and the government need to step in and ensure the right balance between state policy and consumer rights.
A better way for banks, including those focussed on market capitalisation and bottomlines, to promote digital payments is to offer incentives to consumers and firms to shift to digital platforms. Instruments like transaction fee may lead to cash hoarding, put off potential customers and render financial inclusion an even more difficult task.