Are banks in India making too much money from their customers?

Have you ever seen the branch of a bank in India, any bank, barring the ones that go bust, shutting down? I’m not talking about moving but shutting down for good because of lack of business? Even some of the most inefficient government owned banks have had their branches multiplying like rabbits. You see them putting out ads looking for office space on long lease, shops for ATMs and flats for their employees even when the rest of the country worries about a recession kicking in. All of this is because banking is an insanely profitable business.

Here are sales and profit figures of some of the major private banks in India (Data courtesy Capital Market magazine).  See the operating profit margins ranging between 62% of HDFC bank and going to as high as 81% of Karur Vysya Bank.

Private Sector banks

Public Sector banks

If you think public sector banks are less expensive, here’s a little something for you to see. The most profitable public sector banks, Vijaya Bank and Canara bank have profit margins of over 80%! Even on the lower end of this scale, no bank in this list has an operating profit margin of less than 68%. That is over two rupees out of every three rupees you pay them is operating profit for them!

You can see more financials of public sector banks and private sector banks at moneycontrol.

Banks in India seem to charge money for everything, sometimes I think even for the air you breathe in their branches. There is rarely anything free despite the promises you get. If something is free, it’s usually coming out of the interest free deposit you keep in your account with them. Foreign banks are even more expensive to pretty deal with. Many foreign banks require a high minimum balance which is not-interest bearing. In return for the notional interest on this deposit, you get some services that are ‘free’. Standard Chartered is one such bank where you need at least a million rupees to open a EBP 1000 current account. That’s about Rs.80,000 in notional annual interest.

There’s no reason for banking to be so expensive in India. Banking is a commodity business. There is zero value addition in this business. A bank takes money at a certain interest rate and only gives it at an a higher interest rate to another person, making money from the spread. If you’re an account holder, it doesn’t matter if you get a loan from ICICI bank or from HDFC bank. It’s still as useful. You could be paying Rs.500 to a barber for a haircut despite having another next door who would do it for Rs.100 because these in an element of skill here for which you pay. No one in their right mind would turn down a loan at 12% from one bank to take another at 13% from another bank, if there are no other hidden costs. There’s little or no value addition in banking in India. Scale doesn’t matter either. You wouldn’t care if you’re dealing with a small bank or a large bank when you take a loan. This should make it a price sensitive ‘commodity’ business quite like iron, steel, sugar, vegetable oil where traders deal with thin profit margins because they are adding no value, just buying from one and selling to another. What prevents banking from being so is that in India banking is heavily regulated by the government. It’s almost impossible for new private banks to get licenses from the Indian government though a new policy is underway. Meanwhile the existing ones continue to overprice their services and suck the consumer dry. In a developed country like the US this would have called for a class action suit against all the banks. Here people are forced to grin and bear it because class action suits are unheard of.

Here’s one example. When you get a demand draft (DD) made from your bank, one of their employees prepares it, enters the information in the bank’s computerised wholesale jerseys network and gives the instrument to you. This takes less than 10 minutes of time of the employee cheap jerseys who could be drawing a salary of say Rs.20,000 a month. You give the DD to someone as payment and that person deposits it into their bank account. It gets processed like a cheque would. Now here’s what it costs to get a DD made at HDFC bank if you have a regular savings account with them:

Upto Rs. 10,000     Rs. 50
Above Rs.10,000 & upto Rs. 50,000     Rs. 75
Above Rs. 50,000 & upto Rs. 1 Lakh     Rs. 2.50 per 1000 or part thereof (Min Rs. 150)
Above Rs. 1 Lakh     Rs. 2 per 1000 or part thereof (Max Rs 10,000/-)

If you plan to buy a property for an amount of Rs.75 lakhs in Mumbai and have to pay via DD, you would pay Rs.250 for upto Rs.1 lakh and then Rs.200 per lakh with a maximum of Rs.10,000. This means you’ll hit the cap and pay Rs.10,000 for a single demand draft. Order two such demand drafts in a month and you have effectively paid for the salary of the person making the demand drafts out for you though he or she probably spent less than 20 minutes doing it. Of course, your bank will ask you to use Real Time Gross Settlement (RTGS) which is certainly relatively ‘cheaper’ to you but a huge revenue earner for the banks. HDFC’s fee for Outward RTGS is Rs.25 for amounts between Rs.2,00,000 and Rs.5,00,000 and Rs.50 for above that. Why should HDFC, or any bank for that matter, be allowed to charge a fee based on the amount of the transaction? It’s a bank entry. That’s all. Debit Mr Ram, Credit Mr Shyam. End of story. It’s all computerized. The internal cost of these transactions is very low and banks like HDFC continue to charge as much as as they can get away with for it. This is as true for most other banks as it is for HDFC bank. SBI has similar charges for RTGS transactions.

Various small and large businesses in India continue to get stuck with these huge bank charges, raising their cost of production. They do pay less for each DD if of they maintain an interest free average balance but ultimately it is us, the consumers who get stuck with the bill as they factor these costs of notional interest on those deposits into the products and services they sell. This contributes to inflation. What can be the justification for charging fees based on the amount of the demand draft from someone who has a regular savings account? Does it take longer to prepare a demand draft worth Rs.75 lakhs as compared to a demand draft for Rs.500? Does it take more time to process an RTGS transaction of over Rs.5,00,000 than of a lower amount? Why should banks cheap nfl jerseys be allowed to set a percentage of the amount as their bank fee, especially since you are using your own funds and not using an overdraft or availing of a loan? The internal cost is the same irrespective of the amount.

Most banks require an average balance to be maintained depending on the type of account you have. There are ‘no-frills accounts’ (mandated by Indian law) which don’t require a minimum balance but have very limited features and are almost useless for the average salaried person. For other accounts, the average balance required can be anywhere between Rs.1,000 to millions of rupees depending on the ‘free’ services available with wholesale nfl jerseys that account. Businesses which have a current account are required to be keep this amount in their current account and as you probably are aware, current accounts are non-interest bearing. Keep a rupee or a crore in your current account, you won’t get anything by way of interest. Now this ‘minimum balance’ is calculated on a daily basis by most banks. So you could have Rs.1,000 one day and Rs.50,000 the next in your account, the bank averages the balance everyday at the end of the month. If this average is below the threshold, you have to bear ‘minimum balance charges’. Where this becomes unfair to the account holder is that any given time there is no way for you to know what has been your average daily balance so far, during the month. So you could see Rs.1,00,000 lying in your account on the 25th of the month and feel comfortable you are way above the threshold of Rs.10,000. Yet if your balance has been very low earlier in the month, you’ll end up having to fork out minimum balance charges. In the interest of fairness, you should be able to see at any given time when you log into the internet banking interface what your average daily balance has been so far for that month. You should also be told exactly how much you would need to keep in your account for the rest of the month to meet the average balance requirement. Banks must inform account holders via text messages about this. Till this is implemented, charging account holders for going below the minimum balance is being unfair to them. Also, minimum balance charges are ridiculously high at most banks. If you are required to maintain a minimum balance of Rs.10,000 and the balance drops by Rs.100 because the bank issued you a cheap nfl jerseys cheque book, you could get stuck with bank charges of Rs.1,000 if you have a Vyapaar current account with SBI. Never mind that they could have just charged you for an interest on the deficit of Rs.100, to make it fairer.

SBI, like all other banks, continues to charge fees as a percentage of the amount it handles, in case of foreign exchange transactions whether handling remittances or collection of bills. This is very unlike the international practice of charging a flat fee in case of wire transfers.

Here’s a site where you can confirm that US banks typically charge a flat fee for wire transfers. It offers a comparison across the major US banks. Once again, when businesses in India have to bear these expenses for making payments, whether they are importing furniture or apparel, it is the consumer who bears the brunt. This adds to inflation. Even when it comes to fixed deposits, banks like HDFC bank are giving account holders a raw deal. HDFC gives an account holder the option of transferring funds from their SB account to a fixed deposit account automatically beyond a threshold. This, on the face of it, is useful because fixed deposit accounts pay more interest than an SB a/c. Where it starts going wrong is that HDFC insists that this can only be done for amounts beyond Rs.2,50,000. Never mind that your minimum balance is, as per your account’s description, expected to be Rs.10,000. This means you are effectively giving them an interest free deposit of Rs.2,40,000, a potential interest loss of about Rs.20,000 a year. Should you be expected to pay Rs.20,000 a year for the simple facility of automatically transferring excess funds from your SB A/c to a fixed deposit account? This should happen automatically and you should be able to set the threshold anywhere at or above Rs.10,000. Yet, this practice continues. With most banks including HDFC, you can’t break a fixed deposit in part. You have to break the entire fixed deposit. They usually suggest you split your FD into multiple certificates at the outset if you anticipate needing the funds before the FDs have matured. In the age of computerization, this seems silly. Why can’t they split the fixed deposit into units at their end, internally? If you deposit Rs.1,00,000 they should be able to create a hundred units of Rs.1,000 each. If you want to withdrawn Rs.5,000, the rest should remain untouched and not be subject to the premature withdrawal penalty. IndusInd Bank has such a facility of transferring funds into a FD beyond a threshold that you set, which means it is possible. Why can’t HDFC have it? Of course, most banks would be more than happy to extend an overdraft on your FD at 1% higher than your FD interest rate but effectively this means that you pay money to use your own money!

Did I mention that HDFC is one of the most profitable banks in India going by the CASA ratio?

CASA’ ratio is the current account and savings account ratio. Funds in current accounts generate no interest income for the account holders while funds in savings bank accounts generate very little interest income. This gives the bank a ‘float’ of money at a low interest rate which it can then use. Part of these funds are used to give loans for business, cars, real estate etc at much higher interest rates. Not all of it can be used because these funds can be withdrawn by account holders at any time. So a large part of these funds can be used to generate income. This is a simplification and the more elaborate version of this could explain how this is even more lucrative.

The difference between the interest income generated by banks or other financial institutions and the amount of interest paid out to their lenders is called ‘Net Interest Margin’ (NIM). This economic can be as high as 4%, a massive spread enjoyed by banks such as HDFC which is seen as one of the most profitable, something the shareholders understandbly rejoice over. Here is a comparison of NIM across global banks. HDFC had a NIM of 4.2%. This is more than three times as much as BNP, France and over five times as much as Mizuho Financial, Japan.

Banks that are into providing stock trading services have turned those businesses into cash cows with their service charges. Stock brokerage is again, a business with near zero value addition. They may provide you with access to financial reports and results data but most of that is already in the public domain. When you sell a stock, typically, it has to be transferred from your demat account into the demat account of the buyer. This is one computerized entry at your end and another at the buyer’s end with some charges by the stock exchange involved. Again, like the demand draft instance, there is no justfication for charging an amount based on the value of the stocks. It could be a penny stock trading for Re.1 or a stock selling for over Rs.1000 per share. What does it matter? The time taken to enter the transaction is the same. Morever, in these times, with everything being online, I doubt anyone has to physically enter in the information. Banks typically mark up the stock exchange fees when levying these charges.

Here are the charges from ICICI bank.

Let’s say, you sell stocks worth Rs.10,00,000. You’ll have to pay 0.04% as ‘instructions fee’. This amounts to Rs.400. It’s ten times as much if the stocks are worth Rs.1 crore because the cap is as high as Rs.25,000! If someone hits the cap, they could pay Rs.25,000 for a minute’s work of an ICICI employee, assuming someone still does this manually in this electronic age and effectively paid his or her monthly salary. It’s quite like charging someone more money to park a Mercedes than a Honda City. Why should it matter how expensive the car is? It uses the same resources when you park it.

SMS alerts from banks are also overpriced. Till the Telecom Regulatory Authority of India (TRAI) came down heavily on SMS spammers, it was possible to send text messages in bulk for barely 1 paisa each and thousands (1) of telemarketeers were doing it. HDFC Bank charges you between Rs.60 and Rs.100 a year for sending you SMS alerts. If you have a 100 transactions a year, it should be possible to send you the alerts for less than Rs.5. This is a cash cow in the making for the banks. Out of HDFC Bank’s 26 million account holders, 1.2 million use mobile banking, and this is increasing by 30% every quarter. So this can potentially get them between Rs.100 crores and Rs.260 crores when everyone has been signed up. A lot of this would be profit given that the cost of sending text messages is so little. Moreover, it is a well accepted fact that below a certain threshold most people don’t bother to call the bank to dispute the charges. How much time would Government you be willing to give to call your bank to dispute Rs.60 a year? It’s probably just not worth your time but it’s a gold mine for the banks that levy the fee with little or no protest from account holders.

The average account holder would be shocked to know that most banks even charge money for counting notes. Take Axis Bank for instance. If you have a domestic savings account with them, you’ll be charged money for more than 5 cash transactions in a month. From the sixth cash transaction in a month, you’ll have to pay Rs.2.50 on every Rs.1,000 that you deposit or withdraw. This is subject to a minimum fee of Rs.95. You’re paying money everytime you withdraw or deposit money at Axis Bank. HDFC charges its regular savings bank account holders Rs.100 per cash transaction after the first five transactions in a month. Account holders are bring charged to withdraw they own money. What could be worse?

Credit card divisions of banks also generate a lot of cash for the companies at the cost of credit card holders. Some years back there were several news stories about the debt collection agencies retained by some banks using strong arm methods to recover credit card receivables from credit card account holders. Google for your bank’s name with ‘credit card’ and ‘harassment’ as keywords to read about cases. After RBI came down on such banks, banks such as ICICI and SBI started reducing the number of credit cards issued and took huge write-offs.

Finally, to put it in perspective, here’s where you can read that HDFC bank had a ‘fee based income’ of more than Rs.50,000 crores in FY13 while SBI had a ‘fee based income’ of over 11,000 crores in FY13. The article shows some concern because apparently the figures are below expectations!

Prepayment of loans is another area where banks seem to decide their own rules. Prepayment of auto and home loans can cost anywhere upto 5% of the loan amount. This is to make up for the fat commissions that banks give to direct sales associates (DSAs). There are several industries in India which are allowed to make only regulated profits, with only a specified rate of return on their investment. Power and fertilizer companies are an example. Banks are the backbone of the economy. The Indian government continues to speak of inclusive banking and has been unable to control inflation.  Banks need to be convinced to give account holders a fair deal. This profiteering must be prevented in the interest of containing inflation and reviving economic growth.

India needs to make life easier for SMEs to ensure economic growth

India’s economic growth is slipping and the rupee has lost much to the dollar over less than a year. The USD was selling for Rs.51.85 on October 7, 2012 less than a year ago and is today hitting new highs against the rupee every day. Every week you read about the government promising ‘reforms’ for business and further liberalization, assuring people that getting foreign direct investment (FDI) in various sectors and even raising the FDI investment percentage in various sectors is very much on their list. For some reason, only big ticket reforms attracting billions of dollars seems important to them. Walmart is being allowed in to sell to the country and build a potential cash cow for them, with an assurance of just $50 million in infrastructure investment (Would that even build a flyover?). How often, do you hear about the government promising anything for the small and medium enterprises (SMEs)?

SMEs employ close to 40% of India’s workforce and contribute 45% to India’s manufacturing output. That’s almost half of the country’s manufacturing output. There are an estimated 48.8 million SMEs in the country and 81.2 million people are employed with them. Close to 95% of these SMEs are micro enterprises. They continue to trudge along without any real support from the government barring lip service and an occasional mention in the budget announced each year. Despite employing 40% of India’s workforce, they only contribute 17% to the Indian GDP. India’s poor infrastructure is a major factor that keeps SMEs inefficient. Let’s look at Mumbai, the commercial capital of India. Consider how many hours people spend stuck in trains and cheap nfl jerseys buses or in cars on the highway? Now multiply the number of hours wasted per person by the workforce in a city and you see the massive inefficiency plaguing the industry.

Red tape is another huge disadvantage to the average Indian entrepreneur. Dealing with the government involves tremendous paperwork whatever you want to get done. From getting a driving license to getting permits for starting a restaurant, everything involves multiple permissions and a mountain of paper builds up over time, even in this ‘post-liberalisation’ era. Think of all the trees that could be saved if the Indian government chose to do away with most of the paper that it generates. These days, opening a bank account for a proprietorship can involve getting a certificate from your chartered accountant (CA)! If you conduct foreign exchange transactions even on a small scale, sending a wire transfer will involve getting Form 15CB from your CA, generating Form 15CA online, filling out a Foreign Exchange Management Act (FEMA) declaration, giving the bank an invoice, a letter and the wire transfer information while at the same time deducting tax at source (TDS), depositing it with the government as also depositing service tax. If you’re wondering about the TDS and service tax, TDS has to be deducted whenever you are making payments to an overseas entity. Service tax is payable ‘by reverse charge’ when you are buying services from abroad. There are various heads for service tax and each head requires separate registration. Service tax, VAT and TDS require filing periodical returns whether you have had reason to deposit any tax or not. This means even ‘Nil returns’ have to be filed.  Tax compliance has been made more and more inconvenient. You are expected to deduct tax when making payments and deposit it with the government every month. Similarly service tax and VAT payments have to be collected and deposited each month. Filing returns for these various taxes have been made more frequent by the government over the years and the compliance burden on the average small business is so high that it is near impossible not to make a few mistakes now and then. Penalties for mistakes in filing taxes have been increased manifold in the last couple of years, in some cases, ten times! Not surprisingly, there are close to 2,00,000 companies that have stopped filing returns altogether. It is reasonable to assume that many companies which do not file balance sheets with the Registrar of Companies (RoC) are unlikely to have met their tax liabilities. Shutting them down is time consuming, expensive and fraught with the same red tape. When they came out with an exit scheme in 2010 for voluntarily shutting down these companies, the government received around 10,000 applications from companies that wanted to shut down. This was described as a ‘good response’ oddly.

Paying taxes just not end at that. A large number of cheap jerseys tax cases end up in court, clogging the system and wasting the time of the average SME entrepreneur. The biggest litigant in Indian courts is the Indian government. Among these cheap jerseys the biggest litigant is the Income Tax department. When the government picks a fight with so many tax payers, they are not only wasting resources of the courts but directly harming the industry by taking away the time that could have been spent managing and scaling up production. The scope of laws in our country is too wide and too much discretion is provided to bureaucrats. This leads to corruption and litigation. I have seen tax guidelines of countries, such as Singapore, which Hungry are actually readable. An average person with some education can read and understand what they are in for. India’s tax laws are cryptic, archaic, verbose and lend themselves to too much discretion. Red tape, corruption and poor infrastructure leads to increased production cost for the SME sector making it impossible for local manufacturers to compete with China even in the local Indian market, let alone the overseas market.

What is needed urgently is a SME policy to overhaul the entire SME sector. Red tape of all sort needs to be kept at a minimum or done away with altogether. There are various inefficiences in the way data is handled likwidacyjn? by government departments. These inefficiences need to be fixed. Reducing the tax compliance burden of SMEs is as important. SMEs should be permitted to file all tax returns annually instead of monthly. The threshold for service tax and VAT is unrealistically low at Rs.8,00,00 (About $13,000) and has been raised over time at a very slow pace. The threshold, ideally, has to be at least twice the present level. Right now companies are expected to get their accounts audited irrespective of their turnover. This practice creates a lot of pressure for new companies Write and seems unnecessary for companies that have yet to report any reasonable turnover when proprietorships reporting millions in turnover continue to be exempt. Penalties for lapses in tax filing, in the interest of creating a fair regime conducive to business, should be restored to the earlier levels. Imposing penalties isn’t working to disuade people as is clear from the hundreds of thousands of companies that have stopped filing balance sheets with the RoC. A simplification of processes will go a long way in encouraging compliance. As regards penalty,the government should consider paying similar penalties itself to the taxpayer in cases of delayed income tax refunds or when the government machinery makes mistakes in processing returns. Government websites have a habit of crashing, are infrequently cheap jerseys updated or have missing information and dead links. This has to be looked at and instead of the permanent focus on widening the tax net, more needs to be done to encourage small businesses and add value.

I wrote last week about the Indian government preventing salaried people from turning entrepreneurs. Such policies and laws come in the way of entrepreneurship. People need to be encouraged to start businesses and not scared away from all forms of entrepreneurship. Everyone who wishes to invest time and money to start an enterprise has to be encouraged. The government should look at launching coworking spaces to make it easier for startups to launch without the pressures of having to lease offices. A broader policy to encourage innovation in businesses, investment in startups and Persons in businesses that are net foreign exchange earners is the need of the hour, much beyond the ‘Served from India’ scheme. Companies can meet their Corporate Social Responsibility obligations by investing in wholesale nba jerseys startups, as per guidelines in the last union budget but a lot more is required. Investment in the SME sector has to be greatly encouraged. The United States had implemented a policy providing for bonus depreciation to companies making investments under the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, which provided for between 50% and 100% depreciation of all investments made by SMEs. It was for companies investing upto $2 million recognizing that it is the small and medium enterprises that create more employment than the large scale sector, overall. The Indian government, on the other hand, provided for allowance for new, high-value investments of over Rs.100 crores snubbing the SME sector altogether, in their obsession with big ticket investments. What is needed instead is to keep the interests of the SME sector in mind and frame policies that will stimulate investment in the sector, doing away with red tape and making it easier for people to do business. That will create value, pressures add to the economic growth and result in more equitable distribution of wealth.

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How the Indian Government Prevents Salaried Persons from Turning Entrepreneurs

Starting and running a business in India is a challenging task. Despite all the claims of making it easier for people to start businesses, it remains  difficult to do so. When you consider the compliance required in terms of licensing (despite the claims of liberalisation), tax returns, government  approvals along with the poor infrastructure, it comes across as an uphill task. There is one aspect that makes all these challenges pale in comparison and that has gone unnoticed. In a change to the tax laws brought about in the union budget of 2004-2005, presented by the United Progressive Alliance (UPA) government, there was a clause introduced that now disallows set off of business losses against salaried income. Here’s the clause:

No set-off of business loss against income from salary

Under the existing provisions of sub-section (1) of section 71, the loss computed in the current year under one head of income is allowed to be set off against income computed under any other head. However, losses under the head “ Capital Gains” are not allowed to be set-off against income under any other head. In order to prevent abuse of the provisions of set-off of losses, it is proposed to amend section 71 to provide that an assessee shall not be entitled to set-off of any loss under the head “Profits and gains of business or profession” against income under the head “Salaries”. The proposed amendment will take effect from 1st day of April, 2005 and will, accordingly, apply in relation to the assessment year 2005-2006 and subsequent years.

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Assume that you’re employed with a company and plan to start a business. You invest in a new venture in partnership with someone maybe, giving a few hours to it each day and look forward to running your business full time eventually. Meanwhile you continue to draw a salary of let’s say Rs.6,00,000 a year. since you keep your day job. You also keep your living costs low because new businesses can run to losses at least initially and you need your salary to bankroll it. To keep things simple let’s also assume that you spent Rs.3,00,000 in the first year on your business and generated insignificant revenue. Now all you had was Rs.3,00,000 to yourself. You should, ideally, be asked to pay tax on this amount of Rs.3,00,000. With some tax planning such as investing in an equity linked savings scheme, you would be paying zero tax. This is what would happen if you were running one profit making business with a gross profit of Rs.6,00,000 and another loss making one with phentermine without prescription losses of Rs.3,00,000. Unfortunately, you’re salaried and your salary is your source of revenue. With the above clause that prevents setting of business losses against salaried income, the government really hits you where it hurts. At tax time, you’ll find you are liable to pay tax on your entire salary, even on the part of it that you lost in your business! This change brought out in the union budget of 2004-05 probably comes in the way of the dreams of millions of people who aspire to make the transition to running their own businesses. It is hard enough for a salaried person to do away with the certainty of a salary and plunge into the uncertainties of entrepreneurship in a country like India where entrepreneurs are taken seriously only when they are successful. To have to pay tax on a phantom income, that doesn’t even exist is a huge disincentive. Like many other laws in India that stifle freedom, this one stifles the freedom of a salaried person to start a business.

Oddly, there hasn’t been even a token protest about this section though it has been in force for the better part of a decade.

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