Cash withdrawal fee

What is the issue?

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.

What are the impacts?

• Customers will now have to pay a minimum of Rs 150 for every additional cash transaction at the branch after the first four transactions.
• India’s largest bank, the SBI, 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 incorporated to promote digital payments in alignment with the government’s broader push on digital economy.
• A digital economy is expected to further tax compliance and, in turn, higher revenues.
• But 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.

Is the justification valid?

• Forcing people to switch to digital forms of payment by levying steep charges can’t be an optimal solution.
• The use of cash is still widespread and with a large unbanked population and informal sector.
• Banking is still a privileged business where regulators allow a limited number of entities after making sure that they are the ones customers can trust.

• One of the accepted principles of good regulation is weighing the costs to customers against the perceived benefits, of a proposed move.
• By this logic the current move is more detrimental with less benefits.
• A competitive financial system does have its benefits.
• But banks ought to also fulfil some of the aspirational needs of the country.
• The RBI’s mandate is also to extend customer protection.
• Therefore the government need to step in and ensure the right balance between state policy and consumer rights.

What is the way ahead?

• A better way for banks 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.

Source: The Indian Express