The central bank has directed commercial banks to fix the service charges with the approval of the board of directors and operationalise them at the branch level without any delay.

The RBI has taken the decision following the recommendation of the Regulations Review Authority--deputy governor YV Reddy. According to the central bank, the IBA guidelines on service charges are against the principle of competition and any fixation of rates, even of advisory nature, "tantamounts to fixing prices" which can be deemed as a restrictive trade practice.

The industry has hailed the RBI move describing it as a "practical" decision as the current practice of indicatingbanchmark rates undermines competition. Speaking to The Financial Express, State Bank of India chairman GG Vaidya said: "Now the banks will be free to fix the service charges in accordance with their cost structure. We will look into our service charges soon."

IBA secretary and CEO MN Dandekar said: "The association was circulating only the benchmark service charges and the banks were free to fix the actual charges on their own. It is ideal that service charges are fixed at the bank level, depending on individual bank's cost analysis."

The RBI directive on fixation of service charges along with likelihood of industry-wide wage pact being dismantled will force the bankers' body to change its profile. The IBA has, in fact, kicked off the restructuring exercise following the recommendations of consultancy firm Arthur Andersen. "We are in the process of changing the profile of the association. The focus will be on issues like risk management and industry studies," said Dandekar.

The last time the IBAfixed the benchmark service charges was in August 1997 and the member banks accordingly revised their charges. "We have since reviewed the entire matter of fixing rates for various services charges by the banks and it has been observed that the existing practice was consistent with the past regime of administered interest rates but is no more consistent with the current accent on competition," the RBI directive-- issued by its department of banking operations and development last week-- said.

"It has therefore been decided that the practice of IBA fixing the benchmark service charges on behalf of member banks should be done away with and the decision should be left to the individual banks," it added.

The central bank wants the banks to ensure that the charges are reasonable and "not out of line with the average cost of providing these services". It has also asked banks not to "penalise" customers with low volume of activities while framing the service charges.

Industry ovservers, however, said theservice charges are likely to go up as banks are pusing hard for growth in fee-based income in the face of tardy credit offtake.

Insight:

A good move

Doing away with a centralised system of fixing service charges is a good thing for the better-run banks. It is, however, a fact that service fees could be increased in a number of cases and is in line with the move initiated by a number of banks to have a larger proportion of fee-based income, like the foreign banks. But there is one rider. Indian banks are known for their poor quality of systems and lethargic staff. These need to be upgraded before fees can be consistent with the management's expectations.

-- Aaron Chaze