The Hindu Business Line : Banks face charges

One of the lessons of abolition of economic controls is that freedom without responsibility can be as inimical to the economy as complete government control was. The idea of market-driven enterprise, unbridled by regulation, has proved to be a myth as nations put in place some form of controls to ensure no constituency is harmed by the behaviour of another. In India, this is happening in the financial system that has been increasingly freed of controls.

In 1999, reversing an earlier practice of the Indian Banks' Association setting service charges, banks were allowed to fix their own fees for the services that they offered. Seven years later, a working group of the Reserve Bank of India has found some of these charges to be unfair, others opaque and a few that the banks could not explain in terms of the cost of service. The panel found that over the seven-year period, public sector banks tended to follow their private sector counterparts in fixing higher service charges rather than follow the IBA benchmark rates. In 1999, banks were granted the freedom to be "consistent with competition," as the panel notes; in 2006, this was hurting the customer because the panel found that banks were not following the advice to price their services reasonably keeping in mind the average cost of the service or the profile of the customer.

The panel's report is a welcome addition to the growing recognition of the need for intervention to ensure fair play in the operation of `market pressures' that should, but fail to, achieve that happy goal. It is also a welcome sign that the RBI was encouraged to set up the panel by the complaints of "unreasonable and non-transparent charges" for various bank services. The working group does not suggest reverting to the practice of IBA benchmarking service charges. It is only fair that banks have the freedom to price their services. But it is equally important for the price to be in consonance with the service rendered, and for the customers be fully aware of the fee before they use a service. Reasonableness in the pricing is the keyword, and the panel suggests certain services be charged differently for pensioners, senior citizens, rural area customers, and individuals as against non-individual entities.

This is the second time this year the RBI is intervening in the interface between banks and customers. Earlier this year, it issued guidelines on the best practices for the credit-card business of banks. The basic thrust then was transparency and the `right to know' the terms and conditions before the credit card was issued. The same principles inspire the present panel's suggestions for best practices in fee-based services — to help the consumer make a choice of service based on all available information about its contents and price. It is the hallmark of a free and fair market that such interventions are considered educative and not intrusive in the exercise of economic choice.

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