HDFC And Axis Levy On Cash Transactions Makes Sense; PSU Banks Should Follow Suit

The decision of HDFC Bank and Axis Bank to raise cash transaction fees at bank branches is a step in the right direction, though these fees have always existed in some private sector banks. ICICI Bank has not raised the fees it charges for cash transactions post-demonetisation, but the old charges remain.

A news report says that these banks will charge Rs 150 for cash deposits or withdrawals at branches, after four free transactions. It is not clear if public sector banks, which operate under the thumb of the Finance Ministry, will also follow suit, but if they know what is good for them, they should do so.

Pre-demonetisation, the Reserve Bank of India (RBI) had been busy trying to discourage banks from gouging customers by levying all kinds of fees. Among other things, it limited the fees banks can charge on ATM transactions, including at ATMs belonging to other banks.

But post-demonetisation, the government and the RBI have been trying to push non-cash payments, forcing banks to subsidise card and other user charges.

Both approaches are counter-productive. While the government is free to promote non-cash modes to reduce the cash-GDP ratio and establish an audit trail for undisclosed incomes, this makes sense only in the short term. In the long run, it cannot hope to subsidise cash or non-cash transactions beyond a point, and the costs should be recovered by individual banks based on the cost of providing these conveniences.

While the cost of maintaining digital platforms and payments systems should diminish once the volumes come in and network effects take over, cash imposes costs on both – the issuers of currency (ie, the RBI) and its handlers (banks and others). These costs are largely not recovered from customers.

So, it is logical that banks at least should start charging fees for allowing customers to deposit and draw money from branches. Handling cash through branches and ATMs costs money, just as handling cards does.

Banks and the government should not privilege cash holdings over digital modes by trying to subsidise physical cash.

This does not mean non-cash payments should be privileged by offering endless subsidies. In six months or a year, banks should be allowed to charge fees based on their cost structures.

What non-cash transactions need is a government fiat that mandates merchants and payment receivers to compulsorily accept cheques, cards or e-wallets when the amount exceeds, say, Rs 500. This does not deter anyone from paying cash or receiving cash above this limit, but merchants should not have the option of refusing non-cash sums above this level.

Neither cash nor digital transaction modes should ultimately be subsidised. But the discrimination against non-cash payments needs to be ended.