Rajan wants freedom for public sector banks to make commercial decisions

RBI Governor Raghuram Rajan today said the government should allow public sector banks to make commercial decisions independently and that the government's mandates should be backed by financial payments.

The RBI governor also hinted at the central bank easing rules regarding service charges levied on banks customers. RBI has already relaxed rules regarding charges on use of ATMs.

Since banks pay for their customers using ATMS of other banks, Rajan said, banks should be compensated for the loss.

There is ''no free lunch'', Rajan said.

''The ATM transaction is free to you but not free to the bank. It costs the bank Rs75 to Rs100 for those five transactions. The bank has to collect that amount from somewhere and it has to be from customers. But there are two distortions that it creates. First, not everybody is doing the same amount of transactions and (also) are we subsidising using of cash by freeing up ATMs?'' Rajan said at FICCI's banking conclave.

He said that since this increases the bank's costs, it is passed back to the customer in some form. Ultimately, those who transact more are subsidised by those who transact less.

The RBI has reduced the number of free transactions per month at any non-home bank ATM to three from five earlier. This will be effective from November in the six metro cities of Mumbai, Delhi, Kolkata, Chennai, Bangalore and Hyderabad. Banks are also allowed to charge their own customers for more than five transactions at their own ATMs.

Rajan, however, clarified that although RBI has allowed banks to charge customers, that does not mean that banks have to do so. ''If you like your customers to use free ATMs you can subsidise the transactions. What we have done essentially is (to) let large banks make better business decisions and reduce the hidden cross-subsidy and make it more transparent,'' he said.

However, he said one of the biggest concerns in the banking sector is the legacy of non-performing assets. ''The public sector has tremendous resources, but we need to benefit fully from its strengths by rooting out the bad apples,'' he said.