The move follows the recent RBI directive to the Indian Banks' Association (IBA) to abolish the prevailing system practice of fixing the benchmark services charges for the banking industry with immediate effect leaving it to the individual banks. In a directive to Fedai, RBI said "...any indication of such charges even as advisory or guidance would tantamount to fixing a price and is thus a restrictive trade practice. This undermines competition, it was therefore recommended by the Regulation Review Authority (RRA) that the practice of fixing any sort of charges should be totally dispensed with and the banks should have the complete freedom in this regard."

However, to avoidcomplaints, it would no doubt be necessary for the concerned bank to ensure that charges are not out of line with the average cost of providing services, RBI said.

"We observe that even in the revised rules being brought out by you specific charges have been fixed for various types of forex transactions. You are, therefore, advised to initiate immediate action to follow the approach suggested by the RRA and the action taken in this regard may intimated to us expeditiously," the RBI letter to Fedai said.

Banking industry sources pointed out that the RBI move to direct FEDAI and IBA to do away from fixing benchmark charges is in conformity with the spirit of deregulation in the financial sector. "There will be fierce undercutting by banks on services like guarantees and letter of credit offered to corporates," a senior banker said.

The central bank has already directed commercial banks to fix the service charges with the approval of the board of directors and operationalise them at the branch levelwithout any delay while dismantling the service charges fixed by IBA.

The central bank also made it clear that the banks must 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.