Let me begin with a snapshot of service charges/fees applicable on some banking services. For instance, you are required to maintain average balance in your account. It is the minimum amount that is to be maintained in the account.
Some banks calculate it on a quarterly basis, while some have moved to a monthly system. Here it’s important for you to check with your bank about the periodicity of the average minimum balance requirement. If you fail to maintain it, the bank would be deducting charges from your account as a penalty.
Obtaining a duplicate account statement also attracts charges. Here you have a choice to cut down these kinds of charges. Take route of digital services to obtain your duplicate account statement. The banks will give you a 50% or above rebate in such charges.
Banks also charge you for dishonoured cheques. If a cheque which is drawn on bank or deposited with bank is returned for want of funds or any other valid reason, the bank would be deducting charges for the ‘dishonoured cheque’. The charges differ from bank to bank.
Don’t be surprised if your bank charges you for cash transactions. There are banks who would charge you for making unlimited cash deposits or even withdrawals. Besides, there is also a fee charged to a bank customer, if he/she conducts transactions at home as well as non - home (other banks’) ATMs beyond the threshold limit of such transactions per month.
You must remember that your debit card is not free from charges. These charges, which are annual in nature, are deducted immediately after the card is issued. If the card is lost or damaged, you will have to pay additional charges for the new one.
Using electronic modes of funds transfer like National Electronic Funds Transfer (NEFT) and Real Time Gross Settlement (RTGS) too attracts charges. International transactions cost a few percent more because of the currency conversion charge. If you make payments abroad through debit or credit card, a charge of varying from bank to bank is added to the exchange rate.
I have seen a lot of account holders leaving their accounts unused. Over a period of time, these unused accounts fall below the minimum amount balance limit. Once it happens, the bank starts deducting charges. At one point of time, the entire balance of your account can be wiped out. So don’t leave your account inactive and simultaneously ensure your minimum balance in the account is in line with the norms to avoid charges’ deduction. It is better to close the unused accounts.
Meanwhile, currently the most debated service charge which has created a sort of unrest among the borrowers is the Commitment Charges. The banks have been now levying this charge meticulously to make their borrowers use the loan facility (sanctioned loan limit) fully or pay the charges for under utilizing their credit limits.
What exactly are the Commitment Charges?
A fee charged by a bank to a borrower for the unused/underutilized loan facility is known as Commitment Charge. Generally, a commitment fee is specified in the terms and conditions of the loan sanction document wherein it is mentioned that a fixed percentage of fee would be payable by the borrower on the unused or unutilized loan amount. It is worth mentioning that the Commitment Charges have Reserve Bank of India (RBI) backing. As per RBI guidelines, banks are free to evolve their own guidelines in regard to Commitment Charges for ensuring credit discipline. However, banks are under obligation to follow Fair Practices Code and keep all information on all charges upfront to customer on their website, including information about Commitment Charges.
How banks calculate Commitment Charges?
Generally speaking, the Commitment Charges are calculated on the amount of credit line or loan limit underutilized. This unused part of the loan limit is multiplied by the ‘Commitment Rate’.
For instance, a borrower availed of a loan worth Rs.50 lakh from a bank at an interest rate of 10% per annum. The terms and conditions of the sanction mentions a 0.5% commitment fee to compensate the bank for its commitment to lend money.
The borrower utilized Rs.30 lakh out of the total loan amount in the first year, which means the borrower unused Rs.20 lakh out of the total sanctioned limit of Rs.50 lakh. The commitment charges will be computed on Rs.20 lakh at the agreed terms and conditions of the loan sanction document, which is 0.5%.
Usually, banks calculate these charges based on the product of the average unutilized credit line balance, the number of days in the period, and the free rate. However, borrowers can negotiate the commitment rate. At the same time, they have to understand that these charges are in no way to be considered interest expenses.
What is the logic for banks to levy such charges?
Commitment fee/charge is a genuine thing and has the RBI backing. It is levied by a bank because once the loan limit is sanctioned to a borrower, the bank has to set aside the sanctioned loan amount from its source of funds to keep the line of credit open for the borrower at a specific date in future irrespective of whatever market conditions prevail in future. If the borrower does not fully utilize the limit sanctioned, the lender cannot yet charge interest to the borrower on an unused portion of the loan. In simpler terms, the unused portion of the loan limit does not earn anything to the bank. While the bank pays a cost for keeping the sanctioned loan amount at the disposal of the borrower. So, the unutilized or unused loan amount bears a cost to the bank. That is why Commitment Charges are collected by the bank from the borrower on the unused funds.
What is J&K Bank’s Standard Operating Procedure (SOP) for recovery of Commitment Charges?
The Bank on January 10 reduced the Commitment Charges to one of the lowest levels in the industry. The revision of these charges has been given retrospective effect from July 1, 2022.
As per the revised structure, there would be no Commitment Charges levied on fund based limits (Working Capital) where loan limit is up to Rs. 10 lakh. Similarly, for loan limits above Rs.10 lakh, where average utilization of the loan limit is above 70%, the borrower won’t be charged any commitment fee.
Average utilization of loan limits below 50% for loans above Rs.10 lakhs would attract a commitment rate of 0.25 % (per annum) of the average unutilized limit plus applicable GST, with quarterly application.
For average utilization of sanctioned loan limit within the range of 50% to 70%, the borrower has to pay charges at 0.10% (per annum) of the average unutilized limit plus applicable GST, with quarterly application.
As per the Standard Operational Procedure (SOP), wherever the Commitment Charges have been levied in exempted accounts/ exempted schemes, the same will be reversed and credited back to the borrower’s account.
Newly opened accounts have been exempted from Commitment Charges for two full quarters, excluding the quarter they are opened in. For instance, an account opened during Q3 of FY 2022-23 (01.10.2022 to 31.12.2022) shall be exempted from charges application till June 30, 2023. Thus, in such cases, Commitment Charges shall be levied for the first time in the quarter ending September 30, 2023. In this backdrop, the Bank will reverse commitment charges applied, if any, in the working capital accounts opened since 01.07.2022.
DISCLAIMER: The views and opinions expressed in this article are the personal opinions of the author.
The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.