Sucheta Dalal :Bank charges that eat your dividend
Sucheta Dalal

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Bank charges that eat your dividend  

Dec 4, 2006

Last week, S.K. Garg from Chandigarh wrote to say that State Bank of India (SBI) had charged him Rs 40 to credit a dividend cheque of Rs 160 from Kirloskar Oil Engines; effectively, 25 per cent of his dividend was gobbled up by the transaction charge. SBI told him that the charge was justified because Vijaya Bank had not honoured the company’s dividend warrant.

Why should the investor be made to pay for someone else’s fault? Garg had received no answer to his query. He has now discovered that banks do not charge for electronic fund transfers (EFT), which is more or less correct. The Reserve Bank of India (RBI) website lists bank charges for electronic transfers, which reveal that most banks indeed do not charge for inward electronic credits barring IndusInd bank which charges of Rs 10 per credit and ICICI Bank which levies a tiny fee on inward credits to its corporate customers only. IDBI Bank is however the only one to impose a charge of Rs 25 per inward remittance under the National Electronic Fund Transfer (NEFT) System.

This finally explained to us the case of Girish Mittal who recently complained that IDBI Bank had charged his father Rs 25 for an electronic credit to his account at Baroda. After this paper reported the case, IDBI Bank told Sebi that it does not charge any fee for electronic credit. At the same time it refused to refund the money charged to Mittal, evidently because the branch had correctly debited the customer account.

If queries at the senior-most level of banks and regulators led to such confusing answers, what is an ordinary customer to do? Every customer who chooses not to contest wrong charges saying they are insignificant (most customers don’t) adds to the bank’s bottomline because it turns into a tidy sum when spread across thousands of branches and millions of customers.

While chasing Garg’s Rs 40 problem we also discovered that not charging for electronic credits might not last forever. The RBI has waived processing charges for NEFT transactions until March 31, 2007 and left service charges to the discretion of respective banks. Four months down the line, if RBI decides to charge processing fees, banks may pass the burden on to customers causing other problems.

After minimum lots for holding shares were scrapped, several investors own single shares of companies. In these cases, bank charges could eat up a significant chunk of the dividend without giving the investor an option to seek alternative modes of payment. Imagine how ridiculous it would be if the dividend received is lower than bank charges.

Clearly, RBI cannot leave all service charge decisions to the discretion of banks; it must think through the issue, especially if it plans to charge banks for NEFT transactions after March next. Welcome to the new world of endless new costs and service charges that quietly eat up significant chunks of the post tax income of ordinary taxpayers. The problem starts right at the very top with a government that is so focused on finding new ways to gouge tax to fund billowing expenditure, that it refuses to consider the overall impact of all these taxes, fees, tolls, surcharges and user charges that are being forked out in addition to all the municipal, state and union government levies.

While the government talks of doubling Income Tax raids and scrutiny cases, there is never a mention of taxpayer convenience. For instance, compulsory electronic filing of tax returns have imposed significant additional costs on people due to India’s low level of literacy, especially tech literacy. Many taxpayers, especially small businesses, have been forced to seek expert help in filing taxes electronically.

While they follow government diktat, the Tax Department has not even bothered to reciprocate the effort by automating the Tax Refunds process. Instead of crediting refunds to taxpayers’ accounts, the department follows an antiquated system requiring taxpayer to sign on the reverse of the cheque before crediting it to his/her bank account.

Can’t a government department that has access to every taxpayer’s bank accounts at least ensure direct credit of refunds? High transaction costs merely for providing automated or electronic systems need to be examined in the context of capital market transactions as well. A couple of cases that need discussion are the high profitability of the National Stock Exchange (NSE) and the National Securities Depository Ltd (NSDL). Both operate at a whopping and identical operating margin of 53 per cent. In NSE’s case, as much as Rs 300 crore out of its operational income of Rs 372 crore comes from transaction charges alone. Listing fees and other charges are barely double-digit figures.

With infrastructure costs recovered over the decade, a phenomenal increase in trading turnover and no worthwhile competition, there is no pressure on both organisations to reduce transaction charges. Such questions are usually brushed off by comparing international costs; but this is incorrect. India has emerged as the back office of the world, because sharply lower employee costs combined with a continuous drop in hardware, software and telecom costs has given our companies a significant cost advantage in the IT sector. Why does this not apply to the domestic market?

Shouldn’t transaction costs drop significantly after a decade of automation? NSE cannot even attribute it to higher employee costs, which are an insignificant Rs 20 crore. NSDL with its 90 per cent market share manages to remain hugely profitable, even after using its infrastructure to subsidize the less profitable Tax Information Network. That could change dramatically if Sebi’s disgorgement order is implemented.

Although retail investors have been protesting high demat charges for several years, the institution has made little effort to reduce the burden. In a fully automated trading environment, the inadequacy of Depository Participants around the country is stunting retail investor growth. Here again, the regulator has abdicated responsibility by leaving costs and charges to the discretion of these near monopoly institutions.

-- Sucheta Dalal