COMMENT: 3 ways in which banks are wiping out benefits of cash ban

Shishir AsthanaMoneycontrol Research

The government’s incompetence at handling the chaos during the first 50 days of demonetisation was in clear display. One hoped for better governance in the days following the cash ban, but unfortunately the government seems completely incapable of looking ahead of the curve and pre-empting future disasters.

Now, when the time has come to deliver the benefits of demonetisation, banks are playing foul. A few banks’ decision late last evening to levy a merchant discount rates on petrol pump dealers is a sign that they extracting their pound of flesh.

Here are three ways in which banks are playing spoilsport.Bank credit: Banks have been reluctant to lend over the past few years to hide their toxic assets. Increasing credit at a time when they were simultaneously asked to show their losses would have jeopardised their operations. Disbursing loans when the banks were running out of capital on account of booking losses would have exposed them further to future shocks. This hesitation on the part of banks coupled with demonetisation has led to credit growth touching a 54-year low of 5.1 percent. Though banks are flushed with deposits, they still do not have the capital to start lending aggressively. Banks will need to shore up their capital before they can start lending or the entire exercise would only mean transferring the cash from under the mattresses to bank accounts. We have yet to see the banks rushing to increase their capital.

Charging for Reducing Interest Rates: A flood of low-cost deposits in banks prompted them to reduce lending rates as per the new RBI formula which requires banks to cut lending rates if their cost of funds comes down. State Bank of India has said that home loan enquiries have increased three times since they have cut lending rates. However, for those customers who have an existing home loan, shifting to the reduced interest rate regime can only be done after paying a fee. This does not make sense since similar interest rate reductions in the past were done without any payment. Further, why should one pay money to banks for lowering interest rates if they already have an agreement for taking the loan on a floating rate basis? By the same logic, it will be worthwhile to see whether banks will pay the consumer more if they decide to increase interest rates – a highly unlikely scenario. A consumer might unnecessarily have to shift their loans from one bank to another to get the benefit of lower rates. But here, too, one will have to pay the processing fee for transferring the loan.Transaction Charges: Arguments between some banks and petrol pump owners reached a flash point when the latter refused to accept debit or credit cards payment for fuel sales. The contentious issue was Merchant Discount Rate (MDR) which the government had waived during the first 50 days of demonetisation. Banks have again started imposing these charges which are 1 percent for credit card transactions and between 0.25 and 1 percent on all debit card transactions. However, Oil Ministry has bought some time (till January 13, 2017) by asking oil marketing companies to defer these charges. If government wants the country to move from a cash-based economy to a cashless one, it needs to ask banks to incentivise such transactions rather than charging it. One would rather undertake such transactions with cash rather than paying a fee for it thus defeating the hope of moving towards a cashless society. Banks are the conduit through which the benefits of a high deposit base are likely to accrue. But if banks use it as a toll gate and start charging for every transaction, the economy would go back to its old ways.