Adhoc Monthly-Quarterly SMS charges and GST on it levied by banks on Cores of banking accounts and its appropriateness

[shivaprasad chhatre]

Upon reading the title of the write-up you may think that the subject matter is very simple and insignificant.  Probably, the reader may also think that there is no need to write such a lengthy article-up. Considering this aspect I felt, I should write this in two parts

Part 1: Executive summary

Part 2: Commentary on the subject matter covering related aspects

Part 1: Executive summary

Those running short on time may read the executive summary portion only. However, those who wish to understand the macro impact and understand the style of functioning of RBI, to whom we look upon as a final authority to address our banking grievances and can accordingly expect what could happen to many of our grievances on banking, in future,  may read part 2.

Please, however, note that details in both parts of the write-up are not to undermine any authority but to demonstrate the reality.

Banks charge customers for most of the services it renders but the source of revenue of the bank is lending activity. If this job is done properly, effectively the banks can improve their earnings/profitability considerably and there may not be any need to charge for petty incidental things on the guise of service. Banks can sustain well with minimal or no service charges on many allied things.

Many times banks do get confused between what it can charge for the services rendered by it (as a bank) and what can be claimed as reimbursement towards out of pocket expenses incurred. Whenever bank charges for the services, it is rendered, it is termed as service charge or fees. These charges/fees come in the ambit of GST.  GST portion of it is expected to be collected by the banks (provider of the service) as a pass-through to the government. Whereas whenever bank collects a certain amount towards reimbursement of its expenses like postage, telephone etc it should go to the credit of expense account thereby reduce the net expenses incurred under that particular head and such reimbursement is not revenue for banking service (business income ‘per se’) and no GST can be attributable to reimbursements of out of pocket expenses.

In these days no bank customer can perform ‘internet banking transaction’ without having an assigned mobile number, email address (optional/ it serves the purpose as a standby arrangement or as an additional mode of communication).

As a mode to render better quality of customer service, pass quick information to the customer or to protect itself against certain eventuality/ies. Banks send different SMS communications to customers either before or immediately after happening a banking transaction, sometimes it is a combination of both and serves as a security measure.

All transactions are reported through ‘pushed structured messages’ (hereafter referred to as SMS) to customer’s or counterparty’s mobile number/s (registered/provided for the purpose). Broadly these SMS sent by banks can be classified into two categories.

• Mandatory SMS (where there is a compulsion from the banking regulator upon banker to communicate)
• Non-mandatory SMS.  (where communication from Bank is either sent as a transaction security features or as a replacement of hardcopy communication or an intimation like email that is sent to customers post-facto as per the choice of the subject customer.

In some cases, SMSes are sent a combination of both. Like OTP to complete PoS, Net Banking transaction and other after the transaction is complete to act as an intimation/confirmation. Thus, this transaction is a combination of both mandatory and non-mandatory SMS.

In many cases, Bank sent SMS to the customer upon completion of certain banking transaction for which the client/customer is charged elsewhere or to the counterparty who has originated the subject transaction like NEFT /IMPS/RTGS credit.

A certain transaction like online / eCommerce, PoS transaction using credit/debit card are based on OTP and/or PIN, SMS which is sent on registered mobile and email address at pre-and post-completion phase/s of transaction. In these cases, Merchand Discount Rate MDR is shared between the banks/agencies. This is one example of mandatory SMS category.

Transactions like informing periodical balance in the account,  credits of cheques, cash deposited in the account, debits of cheques issued, cheque book dispatch, carrying outstanding instructions are customer originated transactions and if the customer wants to have an intimation from the bank, it does the job but charges customer treating them as non-mandatory SMS.

When RBI issued directions SMS charges on 26th Nov 2013, SMS used to cost around 50 paise – Re 1.00 per SMS to bank. However, these days the bulk SMS charges have come down substantially to 5 to 10 ps. per SMS.

RBI issued the reference circular in the year 2013 and advised banks to treat the SMS charges on an actual basis (both in terms of money and number of actual communications) and by doing so it conveyed to the banks that it cannot be treated as a source of revenue by the banks (but it is like an expense reimbursement). Post these directions very few banks realized and as a measure of customer service stopped altogether charging for both types of SMSes.  Few banks started charging only to non-mandatory SMS, Most of the Banks started charging on an ad-hoc basis (even if no SMS is sent during the period) ₹ 5+ GST p.m or ₹ 15+GST per quarter some for both mandatory and non-mandatory.  Most of the banks made an exception to  ‘Jana-dhana’ accounts.  Some banks tried to misdirect RBI / represented RBI through the lobby of IBA, tried to convince RBI that it is difficult to build the usage data and implement its directives expecting that it would be kept in abeyance. Dept of Regulation (DoR), RBI maintained its stand, on paper but RBI miserably failed its implementation.

I can bluntly say that like many other RBI’s directions of these days above direction was also were flouted by the market players or completely disregarded. Even tiny/small banks like Bandhan Bank, IDBI Bank simply did not enforce it and I could see RBI’s helplessness and lack of coordination within RBI’s departments to take action and force the erring banks to fall in line with the regulation.

Many RBI directions have now become like political announcements which are not implemented nor there exist any kind of seriousness on the part of the issuer of directions (who has direct authority to insist on its implementation) to enforce them.

I have been following up on this matter/practice of charging to every customer Adhoc charges (irrespective of any message sent for the customer in the month/quarter) aggressively since last 6 ½ years. I have dozens of emails, letters exchanged between Regulation Department (DBR) RBI, Customer Education & Protection Dept (CEPD), Enforcement Department (ED) RBI, Department of Banking Supervision (DBS) and with Banking Ombudsman, Mumbai and also to Governor, RBI.

The irony is that RBI’s regulation department admits its directions subsists (even today). During the close follow up over 6 years I received some funny /messy replies. The gist is given below:

1. I first took the matter with Customer Education Protection Dept, RBI; Later with Dept of Banking Regulation and Enforcement Departments of RBI. I did exchange a lot of correspondence with both of them.  This matter got tossed among RBI’s departments at different points of time (after that matter was taken with RBI Governor’s office) status at each point of reference was :
2. DBR, RBI who had given the direction observed that implementation of this direction is not their responsibility. ED, RBI (which was expected to deal with the cases of regulatory breach other than FEMA violations which are dealt with by a separate Enforcement Dept, outside RBI) did intervene initially the matter but subsequently remained aloof. ED, RBI arranged refund in two cases of mine and stated this is what they can do and further stated that we will flag the matter internally. It closed file around 3 ½ years ago.
3. CEPD, RBI  who was supposed to be active on the matte did the job of a post office or complaint forwarding agent (and not as a coordinator) throughout.
4. CEPD, RBI at the instance of DBR, RBI advised me to approach the office of the banking ombudsman of the respective state (a complaint about a matter of ₹ 5/-).  I wrote to DBR, RBI that it is absurd to advise me like this due to the following:

Banking ombudsman scheme requires a reference to the bank’s head / corporate office first and if there is no resolution (in one month) one can refer to it. Ombudsman requires some process to be followed by complainants such as enclosing copies of correspondence, proof of complaint and its delivery etc.

It may be also noted that Banking Ombudsman cannot give a generic ruling. It can grant relief in the case under reference. That means millions of customers (if they are aware of the existence of ombudsman, have time and energy/money) should approach Banking Ombudsman and get relief of ₹ 5/- p.m in their specific case/s, as GST component will not be refunded. No one will take the trouble of writing, follow-up) will approach the Banking Ombudsman  for ₹ 5 It may be also noted that If crores of account holders approach ombudsman, for this purpose every month, the ombudsman mechanism will collapse

Banking Ombudsman (BO) expressed inability to act on the reference and attempted to defend the errant bank/s (who was out and out violating directions of RBI’s directions). I had to notify BO that defending the defaulters/rule breakers is a crime against the society, But BO did not budge and contradicted DBR, RBI. Office of Banking Ombudsman too itself kept aside from the scene (despite clear written guidance from CEPD & DBR, RBI to me to approach BO to enforce the master directions). For information of readers, BOs come under the jurisdiction of CEPD,RBI.

Later, I took up the matter again with CEPD, RBI and DBR, RBI who then realized that it is the matter that can be taken up by Department of Banking Supervision (DBS) during the inspections of the banks concerned.

RBI Governor’s office was just watching the communication being tossed between 5 departments but did nothing.

On 24 July 2019 DBR and CEPD,RBI finally pushed to DBS, RBI. One may hope in next few years of inspections of banks the matter may get addressed if DBS, RBI remembers and compels such banks to follow DBR, RBI’s directions. Now, the matter is pending with the DBS, RBI since last 14 months.

The reality is RBI is well aware of the problem. It knows the violations but it does not wish to act against on earring banks for reasons best known to it. Its all department tossed the matter among themselves for years together. I felt sorry to RBI’s different departments failed to understand as to which department of RBI should take action against such banks on this non-adherence of clear directions of RBI for 6 long years.

I have filed a case with Supreme Court which is yet to come for hearing.  Not because this amount is substantial (except for those who have many accounts with many banks) it is because the regulator is showing no interest since last 6-7 years to correct these things which are pretty easy and benefit to bank customers/public at large.

In general, I regret to mention the scary scenario: 

-Each department of RBI looks for itself (and not for RBI) and passes it some other who also do not pay any attention.

-People there  choose to provide evading replies

-Never clarify spell what they mean. Despite best efforts, one does not formally know what it meant (repeats the same line from the ambiguous direction/circular)

Did it not given a message that the general public can assume RBI is a toothless body and cannot correct even banks who defy/violate RBI’s clear directions?

I feel I must mention an example from the United States where a proactive action was taken by Securities Exchange Commission (SEC) on CEO Elon Musk Chairman of Tesla Inc.  Mr.Musk was forced by SEC to resign as chairman and punished to not get re-elected to the role for three years also pay a US$20 million fine. This was over his claims (a simple Tweet) to have had the funding and investor support to buy out stockholders at $420 a share. SEC proactively acted against this big MNC for making a public statement that led to an appreciation in the price of the shares of Tesla Inc. See the vast difference in swift action. Therefore the company’s USA doesn’t take chances with SEC.

I feel RBI must remember that in the long run RBI’s credibility will get further eroded when such acts of RBI and Banking Ombudsman are known to the public.

Part 2: Commentary on the subject & Related aspects in detail:

• For a better understanding of the above case I would like to put on record some raw data:

There are about 68 crores of live Savings Bank accounts of which about 29 crores accounts are Jandhan Accounts and other accounts that are not subjected to SMS charges (due to one or the other factor). Current Accounts are ignored for these calculations. Some banks like Kotak Mahindra, Yes Bank etc don’t charge for SMS. Thus the revenue generation is on 35 Cr banking accounts approx. SMS charge ₹ 5 per month + GST 18% i.e ₹ 0.90 rounded off as Re 1/-). Banks make full money on GST component also as they collect ₹ 1 per month but don’t pass on to Govt as the bank is not a telecom service provider who provide SMS (mobile) facility. A bank is a user of the SMS facility.

Thus on account of SMS Banking gives banks gross earning of ₹ 2520 Crores(Crs) p.a from the banking customers ₹ 2100 Crs p.an including GST amount of ₹ 420 Crs p.a.

Even if GST would have been paid under a mistake of the fact the GST in process of rounding off itself Bank make money ₹ 42 Crs (1.00-0.90=0.10 ps p.m per account) on 35 Crs accounts. Thus in the process of GST rounding off banks pocket ₹ 42 Crs. Actually, SMS is not a banking service. It is a reimbursement claim and the reimbursement does not qualify GST. Thus illegitimate collection by banks on the name of GST (not shared to Govt) is approx  ₹ 420 Cr

Against the Adhoc earnings of ₹ 2520 Crs for non-mandatory SMS banks must be spending around a paltry sum of ₹ 30-40 Crs (@bulk deal rate for all such SMS).

• Relevant text from RBI directions: DBOD. No. Dir. BC. 67/13.10.00/2013-14 November 26, 2013.

Quote:

“Further, banks are advised to leverage the technology available to them and the telecom service providers to ensure that SMS Alert charges are levied on all customers on an actual usage basis. While fixing service charges, banks have also been advised to ensure that the charges are reasonable and not out of line with the average cost of providing these services. Banks have to identify basic services and the principles to be adopted /followed by them for ensuring reasonableness in fixing such charges. Banks are also advised to take steps to ensure that customers are made aware of the service charges upfront and changes in the service charges are implemented only with the prior notice to the customers.”

Unquote:

Can Banks charge GST on reimbursement of expenses claimed? 

Banks are ‘user of SMS facility’ provided by ‘mobile’ / telecom companies (banks are the actual customers/beneficiary of SMS service as such charging by banks to bank’s customer for SMS (the service which banks do not offer) and on top of it charging GST on such SMS charges is inappropriate and is technically fraud. Another fraud misrepresenting facts is that at GST rate of 18% on service bill of ₹ 15 per quarter the GST component  (if we may say so) works out to ₹ 2.70,  whereas per customer account, per quarter, banks are rounding it off 2.70 to ₹ 3.00 making total  ₹ 15+3 =₹ 18.00 per quarter.  Banks don’t pass-on ₹ 3.00 to the exchequer. It is also not akin to input credit ‘for GST’ purposes nor are banks collecting it (₹ 3.00) as an agent of mobile service providers who charge GST to banks on mobile services billed to its bank client. In other words, in every case, banks are making an income of ₹ 3.00 (not ₹ 3.00-2.70 = Rs  0.30  per customer account, per quarter.

This is clear loot if one takes in to account the actual cost of SMS, periodicity of charging and the number of customer accounts on which these wrongful/illegitimate gains are made by banks.  Banks are charging customers for banking services under different heads and reimbursement of SMS, postal, courier, delivery, and conveyance reimbursable, are already integrated with such banking services.

I have perused relevant GST rules before writing on this to aspect to RBI. SMS charges recovery is justified to extent of claiming reimbursement of actuals (if such out of pocket expenses incurred by the bank are not covered elsewhere along with relevant banking service and banks cannot claim anything like service + GST on it as banks don’t render/offer the SMS service).  

RBI advised banks to treat the SMS charges on an actual basis (both in terms of money and number of actual communications) and by doing so it conveyed to the banks that it cannot be treated as a source of revenue by the banks (but it is like reimbursement. The regulator however also seems to have overlooked appropriateness of this aspect even after pointing it out to it many times.

Failure to re-check the veracity of allegations and use of authority to direct the banks, RBI demonstrated helplessness, lack of coordination between RBI departments and that is a cause of concern. It exhibits a scary situation the public at large is facing over this petty matter. I wonder, how long this will continue, how long would RBI take to put banks on the right track and force pool of Banks to obey RBI’s directions on SMS charges”?

Filing a civil suit against each bank for ₹ 5/- every month not being feasible, crores of customers like me are unfortunately at the mercy of RBI and it appears to me that the regulator has directed banks, as a populist move, for allowing its directions to fall ‘on the road to be crushed by banks’.

If the regulator is not serious in seeing the implementation of its own ‘directions’ or cannot enforce it (banks will always flout it) it should not issue such populist directions and show that it is taking steps to protect the common man’s interest.

Justice inordinately delayed is also as serious as justice denied (in many cases) as the impact of inaction spread across segments.  

It is better RBI surrenders before petty and small banks like Bandhan Bank, IDBI Bank (many more) and withdraws the regulation which was probably aimed at the public good. Many generally feel that RBI wakes up only when instances like ILFS, Yes Bank, DHFL burst.

However, contrary to above, in many cases, one may note that if RBI wants to insist and see that it succeeds in implementing its directions it can do it. I will mention a few instances.

1. Is about the implementation of clean note policy (that stopped the banks from whole making note currency notes packets or pinning the currency notes with heavy-duty pinning machine.

2. Making ATMs of all banks open to all the plastic card customers of any bank fee (subject to certain norms).

3. The recent case of making NEFT and RTGS facility free of charge for online banking transaction and making NEFT open for all internet banking customers for 24x 7 despite some accounting and funds management problems the smaller banks may have.

This issue is affecting crores of banking accounts every month. I hope depositor public will raise their concern through appropriate forums thereby compelling RBI to act to implement its 7-year-old directions.

Annexure

Reference correspondence: Some communication referenced in the write-up is given below for information.

1. RBI Department of Banking Regulation email 14 March 2018

2. RBI Enforcement Department email 17 May 2017

3. ICICI Bank Reply referring representation through IBA

=============================================

1   From: Help, DBR [mailto:helpdbr@rbi.org.in]

Sent: 14 March 2018 10:08

To: chhatres@gmail.com

Subject: Fw: Adhoc - quarterly - SMS charges charged by ICICI Bank and many

others contrary to RBI Instructions

With Regards

Department of Banking Regulation Reserve Bank of India

Central Office Building Shahid Bhagat Singh Marg

Mumbai 400 001

Dear Sir,

Please forward the following reply of Directives Division to Shri Shivprasad Chhatre on his  email-id chhatres@gmail.comraju0220@gmail.com>

through 'Help DBR' in response to his email dated December 4, 2017.

"In terms of our extant instructions, with effect from September 7, 1999, Scheduled Commercial Banks have been given the freedom to fix service charges for various types of services rendered by them as per their Board approved policy subject to general instructions on levy of service charges contained in paragraph 6 of Master Circular on 'Customer Service in Banks'

issued vide DBR. No.Leg.BC.21/09.07.006/2015-16 dated July 1, 2015, which is available on our website www.rbi.org.in<http://www.rbi.org.in> under the head 'Notifications'.

Further, banks are advised to leverage the technology available with them and the telecom service providers to ensure that SMS Alert charges are levied on all customers on an actual usage basis. While fixing service charges,banks have also been advised to ensure that the charges are reasonable and not out of line with the average cost of providing these services. Banks have to identify basic services and the principles to be adopted /followed by them for ensuring reasonableness in fixing such charges. Banks are also advised to take steps to ensure that customers are made aware of the service charges upfront and changes in the service charges are implemented only with the prior notice to the customers.

As regard grievance against the particular bank, a complaint may be lodged with the branch of concerned bank or its controlling office. If the complaint is not redressed within one month, complaint can be made to Banking Ombudsman,under the Banking Ombudsman Scheme, 2006. The details of the Banking Ombudsman Scheme are available on RBI's website

www.rbi.org.in<http://www.rbi.org.in>."

Regards Bhagyashree Ingole

Directives Division DBR RBI CO

==============================

2. From: Anil K Sharma  Sent: 17 May 2017 17:32
To: shivaprasad chhatre
Subject: RE: Objection against ad-hoc debit of quarterly SMS charges to my SB account bearing number 062710011006522 with Bavdhan Pune branch on 11-03-2017

Sir,

Reversal by the banks is the minimum possible at their end.

But we have taken note of this practice and will flag it appropriately to the regulatory department internally.

Thanks again for bringing all this to our notice.

With best wishes

Anil K Sharma

 

CGM, EFD

3.  Gist of ICICI Bank’s final Reply on the grievance related to charging for SMS on Adhoc basis:

With reference query regarding the RBI circular on levy of SMS charges only on "Actual usage basis", ICICI Bank communiqué as under:

The matter is under deliberation between IBA and RBI in view of the reason that there are some practical difficulties in arriving at the actual usage and prorate charging to customers.

It is represented by IBA that instead of charges levied on "Actual usage basis", banks may be given the option of recovering nominal charges from those customers who opt for receiving the SMS alerts for their transactions.

In case you wish to de- register for SMS alerts facility, you may opt so by giving a specific request at any of our branches. 

 We however assure you that even after de-registration of the facility, customers still continue to receive the mandatory alerts required for transacting through our Internet Banking services like One Time Password (OTP), beneficiary addition, alerts for Debit/ATM card transactions and transactions done through an ATM.

After de-registration customers will not receive a message for credit and debit transactions done through NEFT and RTGS. However, you will receive a confirmation message once funds are credited to the beneficiary account.