RANDOM ACCESS. The great un-banked

For most of us — and by ‘us’, I mean the ordinary, urban, salaried middle-class — any statement to the effect that we are underserved by the banking system might be surprising, or even amusing. After all, most of us hold multiple banking accounts (never mind how much money is lying in those accounts), have at least a credit card or two, and possibly, a vehicle loan and a housing loan as well. For most of us, a bank fixed deposit continues to be the primary vehicle for our savings and forms virtually our entire retirement nest-egg.

For the urban customer, banks are ubiquitous presences, and having to go more than a few minutes to reach one’s branch, or any ATM, is usually pretty rare, and annoying when it does happen. In fact, increasingly for many of us, even the visit to the bank is becoming rarer and rarer. Between internet-enabled bank accounts, smart ATMs and cash and cheque deposit machines, and mobile apps on our smartphones, we virtually carry our bank around with us wherever we go. So to say that this customer segment is poorly served might sound like delirium.

But is it? Have you ever considered what you actually get from your bank? Yes, the bank keeps your money and gives you interest on it. It also offers various transaction services. It offers several other financial products, and, when you do need money beyond your immediate resources and capability, banks also offer loans of different types. Most consumers think this is a full bouquet of services and are quite happy.

But drill down a bit deeper and you will see that all these ‘services’ come at a price. A price that is advantageous to the bank, not the customer.

An overwhelming majority of retail bank customers tend to hold a savings account with a bank. The balance in that account fetches an interest — currently ranging from 4 to 7 per cent. After the introduction of elecronic banking, most of these accounts — except the basic, no-frills ones — come with a debit card, which allows one the ease and convenience of self-banking, anytime. Further, many of these cards are also linked to a payment services gateway (like Visa or Master), enabling the debit card to double up as an electronic wallet.

All that is pretty good, you would think. Of course it is, and all of this costs money. There is usually a charge for the debit card itself. Use the card for payment and the gateway charges a fee — sometimes absorbed by the merchant, sometimes passed on to you. Use your debit card at your own bank’s ATM more than five times a month and pay a fee. Pay a fee to check your balance, a fee to transfer funds, a fee to withdraw cash. The interest on your savings account only slows the erosion of your capital value, since it is negative to the real rate of inflation.

Other than a few public sector banks, passbooks are a thing of the past. But if you are not net savvy, you pay for information on your own account — a quarterly summary is free, a monthly (or more frequent) statements cost you. Any additional query costs you. Even those SMS alerts are costing you.

One still wouldn't quibble about this. Most of us are prepared to pay for convenience, and a reasonable charge so that the business stays viable and these services remain available to us is quite okay. But is this all a banking relationship is about?

No. The fundamental factor in any financial transaction is risk. And banks take zero credit risk on retail customers. Your savings account will not make you eligible even for a one rupee overdraft, even if your balance runs into crores. Your housing or auto loans are fully secured against mortgaged assets and are further resecured by your guarantors (who, under the new laws, are fully liable for your debt if you default). And you pay an interest rate substantially more than the bank's prime lending rate for the privilege! They might lend you against your FDs, but only to the extent of your FD — zero risk again.

Banks do take risk on individuals, when they give them a credit card or a personal loan. But for that, the customer pays moneylender interest rates.

Indian interest rates are among the highest in the world for credit cards, and there is zero differentiation between someone with a great credit history and someone with none. You might have had a savings account for years, but that will not get you a loan to start your dream business. You might not have even delayed paying your phone or electricity bills for decades, leave alone default on loans, but that will not get you even a fractional discount on your charges. Even the amount of credit card risk is low — average outstandings per card in India are of the order of ₹50,000.

Compare that to the amount of dud loans banks report for industrial and business customers (that's what those ‘NPA’ numbers are) and you will know who is ctually enjoying bank funding. A lot of blame for this must be laid at the door of the Reserve Bank of India.

As the banking regulator, it has concerned itself primarily with systemic safety and stability. In the process, the retail customer has got short shrift. That paltry interest paid on your savings account has been used as an excuse by banks to deny all kinds of services to retail customers — and the RBI has let them get away with it.

It is time the retail banking scenario was shaken up. Simply allowing more banks in is not enough. We need a clear differentiation between savings products, risk-based loan products and fee-based services. We need transparent pricing in all three sectors, and free and open competition there, not nominal competition with the iron hand of the regulator unsubtly in the background. And above all, we need a separate, retail consumer-oriented regulator.