The Indian banking industry has grown at least four times in the last 10 years. One of the major factors that adds to its income stream, along with interest income, is a steady increase in income from fees and commissions that is charged from the customers.

Over the last five years, fee income as a percentage of total income has progressively risen for a number of banks. For instance, Axis Bank Ltd’s fee income as a percentage of total income is up from 13% in 2007 to 17% in 2011. Similarly, for IDBI Bank Ltd, it has grown from 3.5% in 2007 to 7% in 2011.

Also See Banking Story (PDF)

The current scenario

Changes in the latest credit policy by the Reserve Bank of India (RBI) will impact your net earnings (interest earned and paid and charges) from banks both directly and indirectly. With the latest increase of 50 basis points (bps), the repo rate has increased 200 bps since April 2010. This means higher interest rate on loans as well as deposits. In the last credit policy, RBI also increased the savings account deposit rate to 4%.

While hike in deposit rates bodes well for customers, it increases the cost for banks. All put together, banks are likely to see tighter margins. Says K.C. Jani, executive director, IDBI Bank Ltd, “In an environment with higher interest rates, cost of funding increases and companies think twice before borrowing; this trend affects all banks."

Says Gaurang Shah, assistant vice-president, Geojit BNP Paribas Financial Services Ltd, “Credit policy is expected to remain hawkish for the rest of the year and may see another 50-75 bps hike in interest rates in FY12."

In this scenario, where net interest margins are under pressure, there is merit for banks to look towards fee income to fill the gap. According to a recent report on the banking sector by Ambit Capital Pvt. Ltd (along with its affiliates it is a full service integrated investment bank, investment advisory and brokerage group), HDFC Bank Ltd, which generates consistent fee income and has core fee income at over 2% of loans, is less dependent on interest rate movement and is relatively better insulated from interest rate risk compared with other banks.

According to Shah, approximately 25-30% of fees come from the retail segment.

What it means for you

Higher credit cost: As mentioned earlier, you will have to shell out more on loans you take, owing to hike in interest rates. This will be offset, to some extent, by higher deposit rates.

Base rates for loans have increased around 200 bps since last year. For example, Union Bank of India has increased its base rate from 8% to 10% and ICICI Bank Ltd’s base rate is up at 9.25% from 7.5%.

Higher outflow on charges: Jaimin Bhatt, chief financial officer, Kotak Mahindra Bank Ltd, doesn’t expect much pressure on margins as increase in costs can mostly be passed on to customers.

In other words, the banks may try and increase their income through the fees it collects on various counts. Says Shah, “In an attempt to offset the negative impact on interest income, banks will concentrate on enhancing other sources of income."

It will become difficult to negotiate your fees on loans and credit cards. Says Pathik Gandotra, head (broking), IDFC Securities, “Credit-linked fees for customers are going to look higher. A couple of years ago such fees got competed out of the market, but are back now—customers will have to pay more."

Banks will not want to forgo any part of the fee income, which means the bargaining power that customers had a few years ago will cease to exist.

Know what you are paying for

With banks’ focus on fee income, it is of immense importance for you to know the precise fees involved in any relationship you may start with a bank. Says Bhatt, “Any change in retail fees would depend on competition in the market, customer acceptance and what other companies are doing."

Savings account: As we move closer to a system with a deregulated savings rate, you may find a simultaneous increase in service-related fees from banks. With increase in savings account costs, banks are likely to be more vigilant in managing them. Says Gandotra, “Deregulating savings rate may mean that fees on maintaining the accounts will go up. The regulator will have to be more comfortable with higher fees from customers."

There is likely to be some amount of innovation in products and charges. We may see different types of savings accounts and may see them being linked to usage.

Bhatt says, “We operate in a dynamic market, will have to see how things change in this market. If indeed margins come lower, we’ll have to see the market conditions at the time to decide on increasing fees to compensate."

Read fee detail carefully: These charges can be in the form of non-maintenance of minimum account balance, charge on the number of transactions at a branch (beyond a fixed number) and account-closing charges, among others. Keep an eye for all such account-related charges and any gradual increase.

Also watch out for any growth in credit-linked fees, such as processing charges, late payment of equated monthly instalments, prepayment and foreclosure charges and credit card finance charges.

If you’re one who has a car loan, home loan or even personal loan, look out for charges on prepayment, processing, and duplicate loan certificates.

Customer protection

As fee income is rising, so are complaints about excessive charges. Keeping such complaints in mind, RBI had asked the Indian Banks’ Association (IBA) last year to form a committee to look into the issue of unreasonable charges. Says a senior officer of IBA, who did not want to be named, “The committee had met and then a higher committee also met but it was not feasible for banks to do anything (about charges). So the status quo remains."

RBI had also formed a committee under the former chief of Securities and exchange Board of India, M. Damodaran, to look into customer service in banks. The committee, which was formed last year, is yet to submit it’s proposal. Says, Ashok Rawat, honorary secretary, All-India Bank Depositors’ Association (Mumbai), and one of the members of the committee, “The report is ready and should be submitted to RBI in around 10 days. Once RBI reviews the report, the details will be out, but customers can expect some positives as far as service charges go."

While the regulator does its bit, you need to keep your eyes and ears open to protect yourself against unreasonable charges.

Graphic by Yogesh Kumar/Mint