[P.S: This is part 2 of the draft reply from Naavi to RBI on the discussion paper released by them on disincentivisation of the use of the cheques to stimulate other observers to place their suggestions before the deadline of February 28, 2013. Part I of the reply is available here. This is still in the draft stage and will continue to the concluding part to be published shortly]

Multipronged Approach

 The discussion paper suggests multipronged approach of disincentivisation involving

 a)    Segmenting the users and setting suitable targets

b)    Total stoppage of cheques above a threshold limit

c)    Setting limits or levying charges on issue of cheque books

 The discussion paper suggests that

 “positive reinforcements for electronic payments alone will not lead to reduction in cheque reduction, but it has to be reinforced unequivocally through certain measures which will disincentivise the usage of cheques quite forcefully.”

 This statement betrays a direct intention of RBI to impose penalties for customers intending to use the Banking system in the manner it is being used at present. I am reminded of the Sanjay Gandhi program of “Forced Sterilization” and how it backfired on the Indira Gandhi Government. If the author of this discussion paper were to ever seek election in the Banking customer community, he would face a similar backlash. We must remember that even good medicine cannot be forced down the throat. E Banking is not necessarily a “Good Medicine”. It could be a “Poison” for many. If RBI tries to force it on customers, it will be committing a grave blunder.

 The matter of technology absorption should be left to time and for the banking generation to become IT savvy enough to take on technology on their own free will.

 The segment wise suggestion such as individual users should be pushed to NEFT and ECS are misplaced.

Currently the ECS system as well as the direct credit of dividend etc used by Corporates bind the customer to a particular bank account. When he wants to redirect the payment to another bank account or discontinue the ECS instruction, he becomes dependent on the Banks’s efficiency and has to face unwanted problems.

 Forced use of P2G payments are also constitutionally questionable.

 The suggestion of total stoppage of cheques above a threshold limit lacks conviction. According to the paper itself only 11 % of the cheques in the system today are above Rs 1 lakh and less than 1% of the cheques are  above  10 lakhs. Hence there is no significant benefit to be achieved by the move unless the maximum amount upto which cheques can be issued is brought down to around Rs 50,000/-. In my opinion such a low limit will seriously hamper SMEs and force them into an unwanted and risky Internet Banking scenario.

 Unlike an individual scenario, controlling the security of Internet Banking access in corporate scenario is more difficult and hence we can expect to see more frauds in SME bank accounts if they are forced to use Internet Banking instead of Cheques for their payments.

 RBI should disclose an analysis of Cyber Crimes in the banking segment to inform the public on how many of such frauds pertain to individuals and how many to SMEs and large companies. Additionally, the breakup on frauds by age group of customers would also reveal how many of the IT aware and IT Non aware customers are victims of Cyber Crimes. Further being “IT Aware” and “Cyber Crime Risk aware” is different.

 RBI should commission a study on how many of the customers are aware of “Phishing”, Man in the middle attack”, “Man in the browser attack”, “Zeus”, “Stabuniq”, “Gozi”, ”Gauss”, “SpyEye”, ”Dexter”, ”Shoulder surfing”, ”Social engineering”, ”Digital Signature”, “SecureWeb”, ”trusteerRapport”, etc. If the survey indicates that most of the customers are unaware of the E Banking risks, then it is a reason to reconsider the decision on the “Dis-incentivisation plan”.

 The RBI also makes an obnoxious observation on levying charges on the cheque leaves. Already many banks charge upto Rs 3 or more per cheque leaf and Banks also charge on collection of cheques, dishonor of cheques, as well as stop payment of cheques. The charges are usurious. At the same time Banks donot provide interest on free floating balances. The interest allowed on SB account is a pittance based on the minimum balance while Banks charge usurious charges on loans on a  daily balance basis.  Presently SB customers are provided a limited number of cheques and a small interest on balance where as Current account customers forego a large amount of balance without interest. If RBI publishes the total interest value of current account deposits in Banks Even at a nominal rate of say 5% p.a. as against 36% p.a. that banks collect on consumer advances, we will know that Banks are getting a large revenue from such customers which far outweighs the cost of issuing cheque leaves to their customers.

 Banking is defined as  “Accepting deposits for the purpose of lending and repayable on demand or otherwise by cheques or otherwise”.  Hence providing “Cheques” is the basic function of Banks linked to its “Banking” business for which RBI has given license to them. Any Bank which considers it as a burden is not entitled to the “Banking license” and RBI needs to withdraw such licenses. Instead if RBI supports such move, it means that even RBI is forgetting its role as a Central Banking agency.

 Hence the suggestion of charging for cheque leaves should be either dropped or fixed at atleast 100 per customer.  It is shameful for RBI to even take such suggestions seriously.

 The suggestion on the levying of charges on issuer of the cheque on an advalorem basis is ridiculous. Having already been charged on the issue of cheque books, it is difficult to understand how the RBI thinks it right to collect further charges on each cheque on advalorem basis. The suggestion is that the charges should be on par with the electronic payments. Ehen E Banking was introduced, RBI and others touted it as a measure to reduce banking costs for the customers. Instead of reducing the costs, E Banking has increased the cost of Banking and today if RBI is considering importing of cost indications from E Banking to traditional Banking, it shows a total bankruptcy of ideas and a surrender to the commercial interests of the banks.

 Collecting charges from the beneficiary of a cheque is even more funny since he is already levied charges from his Bank as “Collecting Banker’s charges”. If now RBI wants the paying bank also to levy charges then they should substantiate what are the contractual relationship between the beneficiary and the paying bank which provides them the power to levy charges. In my opinion considering the law and practice of banking, such a charge will be illegal.

 Over and above all these suggestions the discussion paper in pointing out that there is a need to avoid “slippage to cash transactions” is already building a case for charging higher service charges for ATM transactions.

 The overall effect of the suggestions is that the customer is not paid interest for placing money in the Bank, is charged for every aspect of banking including issue of cheque leaves and he will also be charged if he opts to avoid cheques and draw cash through ATMs.

 The entire exercise as suggested by the author of the discussion paper is only beneficial to those who deal in black money and does not remit any of their earnings into the bank accounts. Traders and SMEs will prefer to sell and buy on cash though this may increase the risks of physical thefts.

 Presently a large number of fake currency is in circulation and there is an opportunity to remove them from circulation if it reaches the Banks, though many bankers are said to actively recirculate such fake notes. If the RBI suggestions on disincentivising cheques is introduced, then it will disincentivise holding and operating of banking accounts and the fake currencies will remain longer in circulation.

  RBI may conduct a separate study on the impact of any increase in the fake currency circulation in the market and factor it to the decision of disincentivisation of cheques. A study of professionals like Bankers, Doctors, Legal professionals etc may also be made to estimate what is the impact of all the professionals stopping deposits of their daily earnings in cash into the banking system.

 ..to be continued


[concluding part will follow shortly. After collecting public feedbacks if any the draft will be finalized and sent to RBI]

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