This is a letter to Mr Narendra Modi, Honorable Prime Minister of India to prevent profiteering by Indian banks and make life easier for tax payers and entrepreneurs. There are 30 suggestions in all, which can reduce inflation, enhance the competitiveness of Indian industry, prevent tax evasion and enhance the quality of lives of millions of people.
Mr Narendra Modi
Prime Minister of India
7, Race Course Road
Date: Monday, May 26, 2014
Respected Honorable Prime Minister,
Sub: Profiteering by banks and encouragement of small business
Please accept my hearty congratulations on being elected as the Prime Minister of India.
Your economic vision for the country and your plans to leverage the strength of each state, to take the nation forward have impressed me greatly. The economic growth of Gujarat under your reign and your motto of inclusive growth have brought a renewed optimism about the country’s growth prospects even amongst some of the most cynical of us.
I’m writing to you specifically with some suggestions I have about encouraging small business in our country and about the profiteering by banks in our country. In the post-liberalization era many private banks have come up. However, banking being a heavily regulated sector there are a limited number of banks and this monopolistic situation is apparently being abused by many of These banks, most of whom have profit margins of over 70%. This in turn is hurting the competitiveness of Indian industry. Please allow me to elaborate on some areas of concerns.
1) Banks and pay orders
When a customer approaches a private bank to make a pay order, typically most private banks charge a fee based on the value of the pay order. If one wants a single pay order made of the value of Rs.50 lakhs, a bank fee of Rs.15,000 is quite common at some private banks. It takes as much time on the part of the bank to make a pay order of Rs.500 as it does to make a pay order of Rs.50 lakhs. There is no justification to charge such an exorbitant bank fee when the funds used belong to the customer and it will take a jumior employee barely five minutes to make the pay order.
2) fixed deposit schemes are unfair to customers
Bank fixed deposits are also structured to inconvenience customers and benefit banks. Sometimes customers have to break the entire fixed deposit when they only need a smaller quantum of funds. The other alternative is to have multiple fixed deposit receipts which is an inconvenience. There is also an option of availing overdraft against one’s own fixed deposit which is like paying to use one’s own money! In the age of computerization banks must be obligated to internally record funds in multiples of Rs.1,000. An account holder must be allowed to break a fixed deposit in part and be issued a fresh certificate for the reduced amount.
3) Banks overcharging for foreign currency
Banks also have a wide difference between the buying and selling rates of foreign currency. This practice needs to be curbed. Alternatively it should be possible for citizens to buy and sell foreign currency. There is no value addition in foreign currency trading. Why should people be charged arbitrary amounts?
4) RTGS charges are prohibitive
Many private banks have different rates for RTGS (Real time gross settlement) depending on the quantum of money being transferred. Again there is no justification for this. It doesn’t take longer to punch in a transfer entry of Rs.1 crore as compared to a transfer entry of Rs.3 lakhs. In many cases this is done via internet banking by the customer without staff intervention. If RTGS has to replace cheques it should be free or close to free.
5) Inward remittance charges
When a business person receives a remittance from outside India, banks charge fees based on the funds received. In developed countries like the United States, banks typically charge a flat fee. The fee charged should have no correlation with the funds received because banks do not add any value here.
6) Overcharging for sending text messages to customers
Banks charge as much as one rupee per text message or SMS sent to their customers. Their cost for each text message is as low as 1 paise. Till recently bulk SMS packages were available at this rate. Their price is a hundred times their cost!
7) Banks are charging money for counting currency.
Most banks even charge money for counting notes. Take Axis Bank for instance. A person who has a domestic savings account with them is charged money for more than 5 cash transactions in a month. From the sixth cash transaction in a month, an account holder has to pay Rs.2.50 on every Rs.1,000 deposited or withdrawn. This is subject to a minimum fee of Rs.95. Account holders are paying money everytime they 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!
8) Sweep in and sweep out facilities are unfair to customers
Some banks offer a sweep-in-sweep-out facility wherein unused funds in savings accounts can be transferred to a fixed deposit account. For this, a bank like HDFC has a threshold of Rs.2 lakhs balance in the savings bank account. This is a loss to the account holder of thousands of rupees every year in interest income lost when it is only a computerized bank entry and banks can offer this facility at any threshold.
9) Demat wholesale jerseys China charges are excessive
When banks transfer shares to and from demat accounts, they charge a fee based on the value of the stocks. Why should it matter what the value of the stock is? Does it take longer to transfer 1000 ONGC shares than it does to transfer 10 ONGC shares? These are just bank entries and the bank does not bear any risk whatsoever. There must be flat fee or a reasonable upper cap on these charges.
10) Stock brokerage charges are excessive
For buying and selling stocks, banks charge as much as 0.50% for brokerage. These are all just computerized entries. No one has to go into a trading ring to strike trades any more. If the United States can have discount brokers, why should we be forced to pay through our nose for trading in stocks? There must be a flat fee or a reasonable upper cap on brokerage for stock trades.
11) Net Interest Margin
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 can be as high as 4.1%, a massive spread enjoyed by banks such as HDFC which is seen as one of the most profitable, something their shareholders understandbly rejoice over. USA’s largest bank JPMorgan Chase & Co has a NIM of 2.37%. Indian banks continue to have a wide spread between the interest they pay depositors and the interest they charge from people who take loans.
12) Prepayment of loans and high penalties
Prepayment of loans is another area of concern. Banks often charge money when customers want to prepay loans, to recover the commissions they (the banks) have paid their DSAs (Direct Sales Associates) to get customers. This practice also needs to be done away with.
13) Lending to the salaried taxpayer
Banks insist on a lot of paperwork and documentation when they lend to salaried people. A salaried person is usually a much better credit risk and a very honest taxpayer. An average salaried person will be more worried about repaying a loan than the creditor will be about recovering it. An identity and income proof and a declaration that gives the bank to recovery from current and future employers should suffice. There are many instances where people, when refused by banks, have taken loans from private money lenders at over 300% interest and been driven to bankruptcy and suicide.
14) Credit cards can be used to increase growth
The credit card division of banks needs to be looked at very seriously. Most banks that issue credit cards charge anywhere between 24% and 36% per annum as interest on the funds lent. Most people are not financially very savvy and this sends them into a debt trap. There is no justification for charging 36% on credit card advances when a loan to buy a scooter can cheap jerseys China be given at 15%. Like in the developed countries, we must also have different and lower interest rates for people depending on their credit rating. We already have a credit rating body; CIBIL (Credit Information Bureau Limited). It is in the interest of the nation to see that people have access to credit cards that offer credit at reasonable rates. When this happens, more and more people will own and habitually use credit cards. The boom in the US during the 1950s and 60s was driven by consumption. We can have a similar consumption-led boom here. This will also mean an expansion of production and economies of scale will result in a lower cost of production. This will make our country more competitive in the international market. We will be better able to compete with Chinese goods within and outside our country. By encouraging credit cards at reasonable rates of interest, we may also be able to counter black money. Today a salaried person who has dinner out with his or her family often doesn’t leave with the restaurant’s bill. Restaurants often tear up or modify the bills to under-report sales. This causes losses of not only direct taxes but wholesale jersey also indirect taxes such as VAT (Value added tax) and service tax. When credit cards are widely used, this malicious practice will be curtailed. The tax revenue generated will also indirectly help infrastructure growth and result in lower our cost of production, thereby enhancing our competitiveness.
15) Big ticket loans to powerful industrialists
There is a perception that many large ticket loans are given by banks to powerful industrialists under political pressure and eventually written off. This needs to be countered.
16) Banks should back young entrepreneurs
There are many first generation entrepreneurs eager to start businesses but who do not have access to capital. There needs to be some way for banks to provide loans to enthusiastic entrepreneurs. Small business has the capability to generate employment directly and indirectly and needs state patronage and encouragement.
There is no benefit to the country to allow banks to indulge in this profiteering. If they pay taxes to the government, so do we. Any money we do not have to pay them, will eventually be taxed in our hands. Sir, banks in our country are contributing to inflation and getting in the way of the competitiveness of Indian industry. I urge you to do something to make them partners in nation building rather than our adversaries.
There are also several areas where the government can help small business survive and thrive. Small business can generate a lot of employment directly and indirectly. Right now, as it stands, SME (Small and medium enterprises) and micro enterprises are burdened by a huge amount of red tape. SMEs employ close to 40% of India’s workforce, but contribute only 17% to GDP. With government support, SMEs can be more efficient, generate employment, improve the growth rate and contribute tax revenue.
17) Indirect taxes and TDS (Tax deduction and source)
In case of VAT (Value added tax), service tax and tax deducted at source, all taxpayers are required to file quarterly or half yearly returns. Tax payments need to be made every month. This places a massive compliance burden on taxpayers. Businesses with a turnover of less than Rs.1 crore per annum should be allowed to file annual returns for all taxes. There are many small entrepreneurs who choose not to scale up their business to avoid the red tape.
18) Sending funds overseas
In developed countries like the United States, there are very few formalities for sending a wire transfer. In our country, since the last few years, we have to fill out too many forms, get Form 15CB from the chartered accountant, file Form 15CA etc to send a wire transfer of even a small amount. This causes considerable inconvenience to small entrepreneurs.
19) Setting off business losses against salaried income must be allowed
As per the income tax act, it is not possible to set off salaried income against business losses. This is very unfair to the salaried taxpayers who aspire to turn entrepreneurs. Even if a salaried person starves and loses most of his income in a new business, he or she is expected to pay tax on the salary. On the other hand a business person who ventures into a new business can set off losses from one business against profits from another business. This anomaly needs to be fixed.
20) Tax on share premium needs to go
A large part of our export revenue in information technology is from call centres and business process outsourcing (BPOs). Many of these enterprises, while precious generators of foreign exchamge do not offer much by way of value addition. As a result, they have very little pricing power and are vulnerable to fluctuations in the foreign exchange rate. We need to encourage entrepreneurship in areas of product development where there can be pricing power. New ventures need capital and the government must make it easier for first generation entrepreneurs to raise risk capital. The UPA II government introduced a tax on share premium, when share capital is subscribed to, in private companies. After pressure from the private equity and venture capital industry, certain groups of people such as designated angel investors were exempt from this. There is no reason for the government to come in the way of people willing to invest their own money in backing new ventures. An investor who uses the enterprise, skill or genius of the founder may buy shares at a premium and this should be perfectly acceptable. Currently share premium needs to be justified to tax authorities and reports of valuers are required. This bureaucratic discretion needs to be done away with and a clear policy favoring entrepreneurs is greatly needed.
21) Crowdfunding and raising capital
In the United States, there are websites like Kickstarter that have come up and led to many unusual creative ventures in science, engineering and the creative arts. There are some crowdfunding websites that have come up in India. We need to have a policy in place to encourage crowdfunding. The wisdom of the masses can result in backing for new and path-breaking products and innovations.
22) Income tax department
The Income tax department and its approach needs a revamp. A large number of 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 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 government and the citizens need to be partners in growth, not adversaries.
23) Single window setup and shut down of companies
To encourage entrepreneurship, we need to make it easier for entrepreneurs to start companies in India. We also need to make it easier for them to shut down their business if their plans don’t work out. Indian is at the 134th position on the World Bank’s ranking on the ease of ‘Doing Business’ for 2014. Singapore, Hong Kong, New Zealand and USA make up the top four and we need to emulate their processes. Entrepreneurs would greatly welcome a single window system for setting up a company, apply for PAN, TAN, Service tax and VAT numbers. The compliance burden for filing audited returns needs to be toned down for smaller companies. Similarly, shutting down companies needs to be made easier. In India, 1,92,000 companies had stopped filing returns with the Registrar of Companies as on July 31, 2010. In July 2013, the UPA government launched a scheme to give amnesty to over 12,00,000 service tax assesses who had stopped filing service tax returns. Given that there are so many defaulters, the government must consider reexamining its systems and policies instead of hounding taxpayers. Penalties have been increase manifold by the registrar of companies in recent years. These should be brought back to realistic levels.
24) Tax laws
Tax laws that affect the common taxpayer and the small businessman need to be easier to understand. The Income tax act and the direct tax code should be simple enough for any adult to understand. Instead we have a system which drives people to chartered accountants and eventually encourages litigation. Bureaucratic discretion in income tax needs to be minimized to prevent harassment of tax payers and ensure easier compliance.
25) Export of services and foreign exchange
Export of services can be a major driver of revenue in India. There are some schemes such as the ‘Served from India’ scheme which exist for service exporters. However, due to the red tape involved, very few have utilized the benefits of these schemes. Net foreign exchange earning businesses should have it easier when they want to avail of duty scrips to import capital goods. There are many aspects of tax such as service tax by reverse charge and tax deduction at source when making overseas payments which hinder export of services.
26) Reduction of taxes
In the last ten years, we have seen a considerable increase in taxes. Service tax was levied at 5% from 1994 to May 2003. Then it was raised to 8%. Today it is 12.36%. Service tax was levied on only three services initially. Today it is levied on almost all services. The system of CENVAT credit is very cryptic and not everyone uses it. This means that service tax is paid at every level, contributing to inflation. Income tax exemption slabs have not kept pace with inflation and are far too low especially for city dwellers. There need to be special exemptions for those living in cities who pay high rent and food costs or an overall rationalization of direct taxes. Less than 3% of our country pays income tax. If the government needs additional revenue, it would be more fruitful and fair to plug leaks in the system and widen the tax net than go after the existing tax payers.
27) Raising capital in financial markets
We need to have a way for companies seeking funds for expansion to be able to tap financial markets by coming out with initial public offers while still being accountable to the investors. As of today there are close to 1300 delisted companies on the Bombay Stock Exchange (BSE) alone. This is thousands of crores of wealth that has gone from small investors to unscrupulous promoters. This money could have been invested in legitimate companies and helped in nation building. BSE has an arbitrary and opaque policy about delisting companies and investors are never sure about which companies are at risk of delisting. This results in small companies being ignored by investors. If this is corrected, smaller companies will get a more fair valuation and be better equipped to raise capital when they want to expand.
28) Internet reach, speed and standards
India’s internet penetration continues to be low in India. Internet tariffs although much lower than the early days continue to be prohibitively high. We need internet to be cheaper than water for the common man. The resulting efficiency, cost saving, competitiveness and innovation from it will make it more than worthwhile. New Delhi is all set to be India’s first Wi-fi zone. This is a welcome development. We could have Wi-fi in all the major cities in India. It doesn’t have to be free as long as it is affordable. This will also be useful to tourists.
29) Shared working spaces
To encourage entrepreneurship especially in industries such as the internet industry, the government can consider setting up shared working spaces for startup entrepreneurs. Such spaces usually have furniture, computers, broadband connectivity, conference rooms, mail handling arrangements and also support personnel available on freelance basis. These facilities will help entrepreneurs run their respective startups by paying reasonable rents and without having to rent large offices. This will also nurture a community of entrepreneurs who can interact and collaborate with each other. This synergy can result in new and innovative companies that can match the likes of Google, Facebook and Twitter emerging from India.
30) Encouraging creativity and protecting creative freedom
A significant percentage of India’s export revenue in information technology comes from process-driven work such as call centers handling support and marketing calls. These are very price sensitive segments because they are all left brained efforts that will eventually be automated. Work in creative fields being right brained cannot be easily automated and needs to be encouraged. This includes the fine arts, drama, music, writing, product design, psychology and many others. A creative approach over an extreme utilitarian approach needs to be encouraged in society. Authors, filmmakers, writers, artists etc need to be given creative freedom and innovation in the creative arts needs to be supported. Many creative projects including books and independent films don’t see the light of the day because of monopolistic situations in the marketplace. There is a need for government support to ensure independent films do get a release, encourage good cinema without restricting creative freedom. Movies have been taxed heavily and this places a great burden on the consumer. This requires reconsideration and change.
31) Helping students from Non-English medium schools make the transition
There are millions of students who complete their school education in a medium of instruction other than English. When they get admitted to colleges, most struggle with their studies and sometimes even the most brilliant among them drop out before they have been able to complete their graduation. There needs to be a way to acclimatize these students with English as a medium of instruction so they can have equal opportunities eventually at the workplace. This can be done by starting a government owned or supported chain of classes to teach English or via E-learning programs. This will help provide equal and fair opportunities to people while also reducing personnel costs for industry.
32) Government websites
Government websites need to be overhauled to make them easy to navigate, aesthetic and reliable with uptime. This will help us get information from them when we need it. It is common for government websites to be targeted by hackers and for them to crash when under pressure, for instances websites of universities when results are declared. In the age of cloud computing, this can be countered by making some changes.
Sir, thank you for taking the time to read this letter. I have full faith in your leadership and conviction in your vision of a prosperous India. I hope you will set this right.
CEO, Quest Mercury Intermedia Private Limited