Banking is a core part of the economy. I can’t really imagine a life without an effective banking channel. Banking industry in India has come a long way. I used to listen with jaws wide opened when my contacts in USA told me 20 years back that they rarely visited their banks and performed all of their banking transactions from their home. I really couldn’t believe then that within next decade Indian banks would start laying the foundation stones for efficient and effective banking along with the convienence. And now I am proud to say that for past 5 years, I may not have visited my bank for more than 10 times. Most of the banking activities can now be effected over internet from the convenience of our homes. We no longer need to go to the bank to withdraw or deposit cash – ATMs can allow all such transactions 24 by 7.
However, this convenience doesn’t come for free and we end up paying through our nose to get this convenience. While some of these charges are hidden, others are explicitly debited to our bank account every other month / quarter. The objective of this article to explain a few charges which may hit your bank accounts and some tips to avoid being hit in the first place.
1. AQB & AMB charges – All private banks generally adopt a minimum account balance which the account holder needs to maintain. Pre-2012, the concept was AQB or Average Quarterly balance which an account holder was required to maintain. If the AQB was not maintained, the account holder was hit with a quarterly charge of around Rs. 250 – 750 per quarter. Now the trend is shifting from AQB to more stringennt AMB or Average Monthly Balance. Now if the average balance over the month is below the required amount, the account holder is hit with a monthly charge of around Rs. 250 per month. The tip is – do not let your bank account go lower than the AQB or AMB at any point of time. If owing to emergency your account balance goes below AMB / AQB, stash funds double of the shortfall for the number of days AQB / AMB was not maintained. I would always maintain my bank balance at around 1.5 times of AMB / AQB to avoid such charges.
Another hidden charges are that the funds which you are maintaining in the form of AQB / AMB can not be put to efficient use. They shall only attract the minimum saving bank interest of around 4%. On a minimum you could have earned an interest of around 8-10% by investing these funds in FD. For example, if your AQB is 10,000, then you would be paying hidden charges of about Rs. 500 per year (Rs. 10,ooo x 5%) owing to notional interest loss. The tip to minimise such hidden charges (notional interest loss) is to shift with a bank which has lowest or no AQB / AMB.
2. Outstation cheques – If you are deposting in Delhi, a cheque payable in Jaipur, then you are basically asking your bank to go an extra mile to get the funds from a seperate city and credit it in your bank account in Delhi. And to do this favour, the bank would charge you a fees. The higher the amount of the cheque, the higher are the charges. Tip – if you can try, avoid taking cheques payable in a seperate city from your debtors. And if you have to accept such a cheque, you may want to deposit the cheque in your bank’s branch in the city where the cheque is payable. For example, consider a scenario where you have a bank account in Kotak Mahindra Bank which has branches in Delhi and Jaipur. You are staying in Delhi and get a cheque payable in Jaipur from Bank XYZ. If you deposit this cheque in Delhi branch of Kotak, the bank would charge you intercity clearing charges as it would need to send the cheque physically to Jaipur to get it cleared. Alternatively, if you want to avoid the charges and if you go to Jaipur frequently, you may want to deposit the cheque in Jaipur branch of Kotak which would then be considered as a local clearing for Kotak and hence prevent the outstation clearing charges to be debited in your bank account. For clarification, Cheques labelled as ‘Payable at Par at all branches of …’ can be deposited in your local bank’s branch and it would considered as a local clearing.
3. Cash Deposit Charges – The time is gone whereby the banks used to accept any limit of cash deposits at cash counters. Cash transactions come with inherent limitation of lack of transparency and in many cases get associated with money which escapes getting taxed. Further, handling cash comes with a cost which requires the banks to maintain a cashier force to count cash, tackle with fake notes and take care of security in cash handling. Hence most of the banks discourage physical movement of cash. Different banks have different charging criterias all aimed towards discouraging customers from depositing cash. Some banks would allow one to a couple of free cash deposits in the branch and would charge a fortune (over Rs. 5 per Rs. 1000 deposited) to accept cash deposits over that limit. Others have placed a maxium cash deposit per day (e.g. Rs. 50K) and would charge if the cash deposits are more than that amount. I would have no tips to escape this charge, except not accepting cash and trying to deal via cheques or online bank transfers to minimise the physical flow of cash. This would also safeguard you with the high risk of fake currency. Also remember, cash transactions over 50K are reported to the tax authorities and can invite significant troubles / queries from the tax man.
4. Cash Withdrawal Charges – Similar to cash deposit, banks incur a cost in disbursing physical cash to customers. It doesn’t deter your rights to the funds lying in your bank account. However, if you need to withdraw large funds in cash, be prepared to pay hefty charges which may be quite similar to cash deposit charges. The best deal is to question yourself if you really need cash and can’t you settle your dues to third party via cheque instead of cash. It would both prevent the cash withdrawal charges as well as avoid unnecessary Income Tax questions.
5. NEFT / RTGS charges – This is one of the newest kind of charges whereby the banks have started charging the customers for providing them the convenience of making bank transfers to any bank account in India, from the convienence of their home via internet. The charges are not heafty, but if you make a lot of NEFT / RTGS transfers, the charges add up quite quickly. Banks charge around Rs. 5 to Rs. 25 per NEFT and around Rs. 25 for RTGS transfers. The advantages of NEFT / RTGS far exceed the charges as you no longer need to write cheques. Payments often reach the beneficiary the same day. However, you may want to club several NEFT transfer over a month to a same person as a single transfer to prevent repetitive charges.
6. Cheque usage charges – Well this is where the banks push the boundaries. Many banks charge customers around Rs. 2 per cheque leaf. So if you request a new chequebook having 50 cheque leaves, you are charged Rs. 100. They sound small numbers, but for business accounts where the number of cheques issued in a month are over 100s, these charges add up. You have two options. One clubbing multiple cheques being issued to a single person and issuing a single cheque. Alternatively, upgrading your bank account which offers you free unlimited cheques. However, you should remember that the upgraded bank account would either come with an express yearly fees or a higher AQB / AMB and hence you are paying hidden charges in the form of notional loss of interest.
7. Cheque bouncing charges – Bouncing of cheques owing to lack of funds in the bank account is an offence and hence most banks charge a fortune if the cheques get returned owing to financial reasons. These charges can be any where from Rs. 250 to Rs. 1500 per cheque bouncing. You must ensure that your account balance supports all cheques which you have issued to prevent both cheque return charges and avoid being sued in the courts !
8. Debit Card fees – The benefits offered by debit cards are vast, provided you use it – e.g. shopping, withdrawing cash from ATMs which are not of your bank, etc. However, I know so many people who are issued debit cards but they never use it. Annual fees of debit cards can range from Rs. 100 to Rs. 250. Further, some banks have started counting a debit card transactions toward the maximum number of free transactions you can do in a month and after that you are hit a heafty charge per transaction. If you just need an ATM card and do not use your card for shopping, etc., you may want to deactivate your debit card and save the bank charges. I would also strongly recommend you to use a credit card instead of a debit card for your shopping needs. This would both reduce the number of banking transactions you are doing per month as well as build a good credit history. For details, you may refer to our article How to Make Best out of Credit Cards.
9. ECS Returns – ECS payments are equivalent of making payments via cheques. In foreign countries ECS is analogous to automatic direct debit payments and bouncing of ECS payments results in hitting your credit score. For details on Credit History & Scores, refer to our article Improve your Credit History – Timeline of Your Current & Future Financial Image . Recently banks in India have started taking it very seriously if the ECS debit payments bounce owing to lack of funds in the bank account and levy hefty charges which may be equivalent to cheque bouncing charges. Bouncing of ECS has become even more common owing to investing into Mutual Funds via SIP whereby a monthly investment into Mutual Fund is made via ECS. You must at all times try to ensure that your bank balance is sufficent to prevent your ECS payments being bounced ! As a thumb rule, make your minimum account balance equal to sum of all monthly outflows.
10. In branch transactions – Even though the banks sound friendly, avoid visiting them physically in the branch to get your banking transactions done. You may not know and they may charge you for doing your transactions in the bank which you could have easily done via tele-banking, net banking or even via ATM machines. Some examples of such chargeable services are cash withdrawal, cash deposits, balance enquiry, fund transfers, Demand draft preparation, etc. You can easily get these transactions executed via ATM or netbanking. Many banks have put limits on how many times you can do free transactions in a month / quarter by visiting the branch.
Some Tips to Avoid Bank Charges
Upgrade Your Bank account
You may want to consider visiting your bank to identify other bank account types which may not attract charges. For example, instead of paying over Rs. 5000 per year of bank charges, you may want to upgrade into a bank account which requires you to maintain Rs. 25000 minimum bank balance and in return avoid such charges. Many banks have got Privilege accounts which require the account holders to maintain a high bank balance and in return the account holder gets facilities such as unlimited cheques, no NEFT / RTGS charges, no cash withdrawal charges, unlimited branch transactions, etc. You must always perform the calculation at the back of your mind on the lost interest on AQB / AMB as that is the cost which shall cover the benefits of avoidable bank charges. If the lost interest cost is more than the charges you can avoid – go for the upgraded bank account.
Subscribe to Alert messages
This is an era of new age banking. You don’t need to visit your bank and get your passbook updated in order to know your bank balance. Almost every bank offers the facility of subscribing to email / sms alerts which updates the account holder of bank balance on a set frequency such as daily, weekly, monthly, etc. Smart facilities also exist whereby you would get an alert message if your bank balance goes below a specific amount. Such alerts are of exceptional utility if you are very busy in day to day life and this alert can make a difference to let you know that your bank balance has less than Rs. 5000 now. If you are not aware of this, your Housing loan installment of Rs. 20K may bounce ! I personally use this facility and so many times I have avoided cheque / ECS bouncing situations.
Avoid visiting Branch
If you can avoid, try doing maximum banking transactions via online banking or tele banking. Most of the banks have started eyeing your visits your branch for your day to day banking needs. Obviously the more customers visit the branch, the more employees are required to service the clients. If the banks can discourage the customer visits, their operating costs go down. Hence most banks promote online banking as well as online requests with reduced charges for most banking services. If you are comfortable in using a computer, then you would be better off using self service netbanking facility which would not only be convenient for you, but also less costly.