Paying for your own money

By Varsha Ramachandran

The conventional method of token system seems to be finding its way back, thanks to Reserve Bank of India’s (RBI) decision to put a cap on the number of free ATM withdrawals. One must now stash up money in their wardrobes or find time from their busy schedules to line up at their banks.

Until now, unlimited free withdrawals were allowed from the same bank’s ATM, but withdrawal from a different bank’s ATM would cost after five free withdrawals. However, starting from 1-Nov-2014, the RBI has allowed banks to charge customers if they use their own bank ATMs more than five times a month. And if they conduct more than three transactions on other banks’ ATMs in a month, they will be charged Rs 20 per transaction. This applies to transactions in six metros: Mumbai, Delhi, Chennai, Kolkata, Bangalore and Hyderabad. This decision comes in the wake of growing costs incurred by banks on establishing and maintaining ATMs.

In the era of high speed transactions, the central bank seems to support the commercial banks in going back to its orthodox ways. The number of ATMs in metros has increased manifolds. Easy and quick accessibility has made it convenient for people to withdraw at regular intervals from ATMs. An average person withdraws more than five times a month from an ATM. Clearly, an ATM has become more of a necessity now. Bringing the minimum to three seems highly irrational.

What is more surprising is the reason behind this decision. The Indian Banks’ Association (IBA) highlighted that cost of ATM deployment and maintenance in growing, thereby asking RBI to put a cap on free transactions at ATMs. The number of ATMs increased from 27000 in 2007 to over 1.5 lakh by end of March this year. The rationale behind increasing the numbers is to make them accessible by as many citizens as possible. If the costs are so high, what was the point of RBIs policy to increase the number in the first place?

Three main costs are associated with ATMs for banks, cost of establishment, refilling, security cost and maintenance cost. Keeping aside cost of refilling for now, all the other costs will remain irrespective of the number of times people withdraw from ATMs. And the cost of refilling will not change drastically because people will withdraw more or less the same amount either in more intervals or less intervals. So what cost are they referring to then?

Coming to the customer side, metros comprise of immigrants and locals. Among the two, immigrants are the ones who tend to use ATMs more than the locals. The cost of going to a bank to withdraw money most certainly costs more than Rs. 20 per additional withdrawal. Moreover, immigrants living in hostels and sharing basis will not prefer stashing money in their wallets or rooms because of the fear of losing it, further driving them to continue using ATMs despite the charges. Locals on the other hand might prefer withdrawing larger sums of money and stashing them in their homes. The basic short term implication of keeping larger amount of cash in hand is liquidity crunch for the banks.

The RBI also aims at increasing the use of electronic financing options such as debit/credit cards for purchases. While this might be a good objective, the biggest flaw with this is the fact that card payment facilities are not available at several small kirana shops in these cities. Moreover, a number of the outlets charge additional interest for card payment modes.

With this move, banks may as well make marginal amount of profit from the fines, but all this at the cost of short term liquidity crunch. This whole concept seems flawed and irrational. Instead of moving towards faster transactions, this decision will lead to tedious and time consuming transactions.

Varsha Ramachandran is a Research Associate at the Takshashila Institution

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