[sbinews] Your account is closed - on the Changing scenario in ATM Cards (The Business Standard)

  • From: rspai@xxxxxxxx
  • To: sbinews@xxxxxxxxxxxxx
  • Date: Thu, 23 Oct 2003 05:42:49 +0530 (IST)

Reproduced below is a very lucid and readable article from The Business 
Standard which explains why Banks have suddenly decided to impose restrictions 
on SB Accounts linked to ATM Cards. 

Your account is closed... 
Having built up their critical base, private banks are now looking at weeding 
out those accounts that do not make commercial sense, says Tamal Bandyopadhyay 
From The Business Standard

Published : October 23, 2003 

Recently, one of the large private sector banks told its savings bank account 
holders that they need to keep at least Rs 5,000 as minimum balance in their 
accounts to remain with the bank. If the balance dips below this, their 
accounts will be terminated. 
Only a few years ago, this bank ? and several peers ? started a new concept 
called ?zero minimum balance? accounts where corporations were encouraged to 
open salary accounts of their employees with a promise that the account holders 
would not require to keep any money in their accounts. 

So, why has the bank changed its strategy? Simply put, without a certain amount 
of minimum balance, savings bank accounts have become unremunerative for banks. 
To be fair, even a minimum balance of Rs 10,000 may not be profitable any 

Here?s how: On a Rs 10,000 minimum balance, a customer gets an interest income 
of Rs 350 a year. To earn that amount, he needs to keep this money for at least 
three weeks every month. That?s because savings bank interest (3.5 per cent 
now) is paid on the minimum funds kept between the tenth and the last day of 
the month. 

Now, if the bank deploys these funds in the overnight call money market or the 
Reserve Bank of India?s (RBI?s) repurchase (repo) window, it can earn about Rs 
450 at 4.5 per cent rate. 

So, the net income earned by the bank on a Rs 10,000 savings deposit is at 
least Rs 100 (it pays Rs 350 interest to the depositor and earns Rs 450 on this 
funds). If the money is lent to a retail borrower, the interest could be as 
high as 9 per cent or so and the bank?s net earning could be Rs 450. Right? 

Banks incur cost not only paying the interest on funds deposited but also on 
customers? transactions. If a customer visits a bank branch once a month, for 
every visit the bank incurs a cost of Rs 60 or so. 

This means that the bank incurs a cost of Rs 720 a customer every year for 
branch visits while the earning on the money deployed as advances is only Rs 

So the alternative before the bank is to put up automated teller machines (ATM) 
and discourage branch visits by customers to save cost. But have they actually 
been able to bring the cost down? One transaction at a reasonably busy ATM, 
which is used by 300 customers a day, costs the bank around Rs 10. Those ATMs 
that get used by about 225 customers a day incur a cost of Rs 15 per 

A customer who used to go to a bank branch only once a month ends up using an 
ATM almost once a week for either checking his balance or withdrawing little 
dollops of cash. If if he visits the ATM three times a month, the annual cost 
for the bank is Rs 360. Add to that, the expenses of four 25-page cheque books 
and four quarterly statements sent through post to the customer?s residence or 

Roughly, one leaf of a cheque book costs 50 paise. This means four cheque books 
carrying 100 cheque leaves would cost Rs 50 while four quarterly statements 
roughly cost banks around Rs 80. 

So, even for a technology-savvy bank, the total cost works out to Rs 490. 
Instead of making a net interest income of Rs 450, the bank actually ends up 
losing Rs 40 even when the customer keeps a minimum balance of Rs 10,000 with 
the bank in his savings account. 

The transaction cost for phone banking is lower than an ATM and Internet 
banking is the cheapest. But not many customers have been using these two 
channels till now. In metros, the frequency of branch visits by customers is 
steadily dropping but a large-scale use of ATMs is not bringing down the cost. 

Recently, there has been a spate of tie-ups among banks for sharing ATMs. For 
instance, the State Bank of India (SBI) has tied up with HDFC Bank as well as 
ICICI Bank for sharing ATMs. SBI and its associate banks have a network of 
around 2,400 ATMs, ICICI Bank has about 1,725 and HDFC Bank has 850. 

Since this is a bilateral arrangement, SBI customers will be able to use both 
HDFC Bank and ICICI Bank ATMs but HDFC Bank customers will be able to use only 
SBI ATMs. Ditto for ICICI Bank customers. And mind you, this will not come for 
free. For every cash transaction, the cost is Rs 18 while balance enquiry will 
cost Rs 7. However, the customers will not have to pay this money. The banks 
will take care of this. 

Most of the new private banks were looking at acquisitions of customers to 
build a base. Initially, the focus was not on profitability. Now that the 
critical base has been built up, they are looking at weeding out those accounts 
which do not make commercial sense. 

ICICI Bank has identified around five lakh accounts that can be weeded out. For 
UTI Bank, the figure is around one to 1.5 lakh. Each of these banks open around 
one to two lakh accounts a month. 

The most common reason for banks asking their customers to move out is the 
lower-than-minimum balances kept in the accounts. Another reason is too many 
transactions in some of the savings bank accounts, are making it a virtual 
current account. 

At the first stage, banks are knocking off the ?unwanted? accounts. At the 
second stage, which is not very far off, banks will start charing fees for 
transactions. In most western countries, every cash withdrawal on an ATM is 
charged $ 3 or so. 

Banks across sectors are also planning to reposition their urban branches for 
two reasons. First, alternative channels like ATMs, telephone and Internet 
banking are becoming increasingly popular and hence fewer customers are 
visiting branches. 

Second, as banks put in place the core banking solution and move to a 
centralised back office, the branches do not require such a huge space. 

The entire reconciliation process involving dusty ledgers kept in wooden racks 
in the semi-dark backrooms are making way for the centralised processing room. 
So, the bank branches do not need so much space. 

Moreover, after the successful implementation of the voluntary retirement 
scheme (VRS) in 2001 about 11 per cent of the employees in the industry have 
gone home. Those who have not taken VRS are not sitting in the branches; they 
are out in the field either marketing new financial products or recovering 
sticky money from the difficult borrowers. 

Some of the banks are moving out of their 2,500 square foot branches into 800 
to 1,000 square foot places to save on rental. Others are planning to open 
coffee shops or allow their small and medium customers to display their wares 
in the branch premises. 

All of them are now planning to transform their branches from a delivery point 
to a distribution centre where more than just dealing with deposits and 
advances, the banks will sell other financial products like mutual fund units, 
insurance, RBI relief bonds and so on. 

This is a new income stream for banks. A typical ICICI Bank branch raises more 
money selling these instruments than regular bank deposits. Fee income from 
selling an RBI bond could be as low as 10 basis points (because most customers 
demand a chunk of the commission) while a mutual fund unit can earn between 
half and one per cent commission and the maximum commission on an insurance 
premium could be 20 per cent. 

This is certainly not bad at a time when corporations are not knocking at bank 
doors to raise project loans and even working capital facilities. 

The fee income works as a sort of annuity for bank branches ensuring a steady 
flow of income over the years. This also completes the transformation of the 
traditional front office bank employee. 

The banker has become a salesman for an array financial products some of which 
may have been developed by a rival financial intermediary! 
Mailing list (sbinews@xxxxxxxxxxxxx) related information:

News/articles about SBI and Banking related matters published  in the print 
media, Internet etc will be circulated through this Mailing List. 
The messages in this list will help in improving awareness of SBI and its 
activities vis-a-vis the happenings in the Banking industry. This should be of 
help to all staff members of SBI, particularly those who are preparing for 
promotional written tests/interviews/group discussions. Subscription to this 
Mailing List is free and simple. Please check the procedure below. 

The messages circulated here should not be deemed to have the official 
endorsement of the SBI or any of its employees. The correct factual position 
may be ascertained from official sources. 

To join this mailing list, just send an email to sbinews-request@xxxxxxxxxxxxx 
with 'subscribe' without the quotes in the subject field. 

To leave this mailing list, just send an email to sbinews-request@xxxxxxxxxxxxx 
with 'unsubscribe' without the quotes in the subject field. 

This is an announcements/newsletter type mailing list i.e. only the Moderator 
can post messages to the list. 

This mailing list is maintained by R.S.Pai currently working as CM (IT-Internet 
Banking), SBI, CC, Mumbai. 

Other related posts:

  • » [sbinews] Your account is closed - on the Changing scenario in ATM Cards (The Business Standard)