With everything from UPI to NEFT being free or very cheap, why do banks still charge such high penalties for a simple automated failure like an ECS bounce? Don’t these charges seem outdated in today’s digital world?
This is a major point of debate in India’s retail banking sector. Many financial experts and consumers argue that high, fixed ECS/NACH return charges are indeed outdated and disproportionate in the digital era. However, banks maintain that these charges are still a necessary tool to enforce financial discipline and ensure the stability of the automated payment ecosystem.
The Argument That the Charges are Outdated
I was discussing this with a fintech analyst, and he strongly argued that these charges are a relic of a pre-digital banking era. He explained that the actual marginal cost to a bank of processing a single failed digital transaction is now almost zero. He believes that a penalty of ₹500 or more is no longer a reflection of the bank’s cost but has become a significant, high-margin source of fee income that creates a very poor customer experience.
The Banks’ Justification: A Necessary Deterrent
My friend who is a banker presented the industry’s perspective. He argued that the charge should not be viewed as a fee for a service, but as a penalty to deter default. He said, “If there is no significant consequence for bouncing a loan EMI, it could encourage a culture of payment delays. This would increase the risk for all lenders, which could eventually lead to higher interest rates on loans for everyone.” Banks see this penalty as crucial for maintaining the integrity of the credit system.
The Impact on Customer Experience and Financial Inclusion
The fintech analyst also made a strong point about the impact on new customers. He said that for a person with a low or fluctuating income who is just starting a small ₹500 SIP, getting hit with a ₹590 penalty for one mistake can be a major setback. He feels such punitive charges can discourage people from using formal financial tools like SIPs and auto-debits, which works against the broader goal of financial inclusion.
1 Like