Saturday, September 13, 2008

No-frills accounts? Be Careful

Banks will soon start offering 'no-frills' savings accounts, and it's good news for customers who are either averse to or not comfortable with maintaining high minimum balances.

You may like to opt for such an account, but it actually depends on individual needs. The two key factors that you should examine before deciding whether to go in for a no-frills account are:

  • How frequently do you need to issue cheques?
  • How frequently do you need to withdraw money?
If your needs are for a limited number of withdrawals in a month and are required to issue a limited number of cheques, say, for payment of utility bills, then this could the best account for someone not willing to keep high minimum balance.

The Reserve Bank of India [Get Quote] has directed banks to offer zero balance or low minimum balance accounts to bring in a greater number of people into the banking fold. The policy of 'financial inclusion' of the poorer section allows banks to restrict the number of withdrawals and the number of cheques that could be issued in a month.

Banks are now in the process of developing their respective no-frills savings account products. The variations being considered include savings accounts where the customer agrees to transact only through ATMs, Internet and phone banking. Such customers will be allowed to visit the branches only for resolution of some disputes.

The zero-balance account could also entail higher charges for services like frequent account statements.

The other variant being considered is to allow a no-frills account with a very low balance of say about Rs 500 to Rs 1,000 and allowing customers to have greater services than those offered to zero-balance account-holders.

Such account-holders could be allowed a certain number of transactions at the branches.

The RBI move is to counter a trend whereby all banks want to target the 'affluent' class. The competition from private and foreign banks has put public sector banks at a disadvantage in their quest for enlisting new clients.

Public sector banks serve clients from the poorest class to the millionaires, while private and foreign banks are seen catering to the well-off classes only.

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