Highlights from the bi-monthly Monetary Policy Review by RBI

April 3, 2014

The key highlights of the bi-monthly monetary policy review by RBI are as follows:

Repo Rate (RR) under the Liquidity Adjustment Facility (LAF) unchanged at 8.0%
Reverse Repo Rate (RRR) under the LAF unchanged at 7.0%
Marginal Standing Facility (MSF) rate unchanged at 9.0%
Bank Rate unchaged at 9.0%
Cash Reserve Ratio (CRR) of scheduled banks unchanged at 4.0% of the Net Demand and Time Liability (NDTL);
Increase in liquidity provided under 7-day and 14-day term repos from 0.5% of NDTL to 0.75%
Reduction in liquidity provided under overnight Repos under the LAF from 0.5% of bank-wise NDTL to 0.25% with immediate effect.

Key proposals by RBI:

Banks should not impose financial penalty on the consumers in case of non-maintenance of minimum balance by customers in their saving accounts.
Banks should also limit the liability of customers in electronic banking transactions in cases where banks are not able to prove customer negligence.
Banks should not levy penal charges for non-maintenance of minimum balances in any inoperative account.
Allow borrowers to prepay floating rate term loans without any penalty.

The above steps proposed by the RBI are intended towards Consumer protection, as Customer Protection is an integral aspect of financial inclusion.
Proposal: “Do not impose financial penalty on the consumers in case of non-maintenance of minimum balance by customers in their Savings accounts“
Currently, there is no accord amongst various banks whilst charging the customers for non-maintenance of minimum balance in their savings accounts. RBI has proposed that in place of charging penalties to customers for non-maintenance of a minimum balance in their ordinary savings bank accounts, banks should limit the services available on such accounts, to those available to basic accounts. When the balances improve to the minimum required level, banks should restore the services.
Why Customer might actually end-up paying more, if this proposal comes into force?
If such a policy comes into force, then albeit customers may not be required to pay for non-maintenance of a minimum balance in their Savings Account but in place they might have to pay additional charges for use of other services in such cases, such as an account statement or ATM withdrawals or cheque book issuance. This could result in an increase in the charges paid by customers in the alternative.
Example: Let’s assume that Person ‘A’ has a Savings Bank account with ABC Bank. Let the minimum balance to be maintained by a customer in his Savings Bank account with ABC Bank is Rs 10,000. If the ABC bank earns 4% on this Savings Account (i.e. Rs 400/- yearly), implies ABC Bank is providing various services viz. cheque book for a year, ATM transactions, bank statements for mere Rs 400/- to the customer ‘A’.
Now, the Break-even for the bank to provide these services is quite high (~ Rs 25,000/-).
So, if Banks don’t charge penalty for non-maintenance of a minimum balance in ordinary savings bank accounts, it would mean that customer will be charged for these services for a year, which is quite high. Since Banks are there to make profits and not to give services for free, means that if banks stop charging for non-maintenance of minimum balance, they are authorized to charge on transactions and in turn the customer ends up paying more.