How would you react if instead of the usual monthly Rs 2,000 SIP investment getting deducted from your bank account, the bank charges you Rs 2,360 as “NACH return charges”. Such a charge can hurt small investors a lot. But when does such an event happen?
Let us assume a retail investor has 4 mutual fund systematic investment plans (SIPs) of Rs 500 each and the amount gets automatically debited from his bank account through ECS/NACH debit or standing instructions. But if the account does not have the required balance on the day of the transactions, he will have to pay up to Rs 590 (Rs 500 + 18% GST) for each of the failed transactions. That amounts to Rs 2,360.
You are forced to pay such a big penal charge that your entire monthly contribution of Rs 2,000 goes towards paying the penalty and it is still not sufficient. You will have to pay Rs 360 more to meet the shortfall. Unless your monthly investment of Rs 2,000 earns an internal rate of return (IRR) of 17.21% in the next 12 months, your investment would not be able to recover this loss.
This is because a penalty is levied when the electronic clearing system (ECS) cannot fulfil a standing instruction (SI) because of low balance in the account. The National Automated Clearing House (NACH) is the latest mechanism banks use for repetitive electronic transactions.
“Levying heavy penal charges for NACH/ECS/SI return on monthly investment mandates, particularly for SIPs of retail investors, raises ethical concerns. Retail investors, often investing modest amounts for long-term financial goals, may face financial strain due to these charges,” says Sanjeev Govila, a certified financial planner and CEO of Hum Fauji Initiatives.
Many mutual fund SIP investors regularly go through such a harrowing experience thanks to return charges levied by electronic fund transfer facilities like NACH, ECS and SI — systems meant to reduce paperwork and transaction cost. “Entirely agree that the heavy penal charges on ECS/ NACH returns is a big problem,” says Suresh Sadagopan, Founder, MD & Principal Officer, Ladder7 Financial Advisories.
Bank | ACH/ECS (Debit) Return Charges^ | Standing Instruction (SI) Return Charges |
State Bank of India | Rs 250 + GST per instance (Rs 295) | Rs 250 + GST per instance (Rs 295) |
HDFC Bank | 1st instance – Rs 450* | Rs 200 per instance |
ICICI Bank | Rs 500 per instance for financial reasons | Rs 200 per instance for financial reasons |
Kotak Mahindra Bank | Rs 500 per instance due to non-availability of funds | Rs 200 instance |
Punjab National Bank | Rs 250 per instance on account of insufficient funds | Rs 100 per transaction plus remittance charges plus actual postage |
Axis Bank | Rs 500 per instance | Rs 250 per failure |
*In a month, Rs 50 less for senior citizens; ^GST charges may apply
Should investors be penalised so heavily for missing a payment for voluntary investment?
When you owe something and are under contractual obligation to repay regularly, then penal charges may appear justified. However, is it justified in a similar way when it comes to saving and investment? “SIPs are voluntary investments, unlike loan repayments which are contractual obligations. Penalising investors for missed SIPs could discourage regular investing habits,” says Govila.
How it hurts small retail investors the maximum
Are these ECS/NACH return charges a way to earn higher revenue for the banks?
Those who invest Rs 500 or less each month have to pay more than their monthly instalment for just one payment bounce in many banks. “The penal charges appear disproportionate to the nature of the failure, impacting small investors disproportionately. It’s crucial to consider the financial capability and investment intent of retail investors before imposing such penalties,” says Govila.
Big penal charges on SIP debit return hits the small retail investors the most. “Punitive charges for missed SIPs might disproportionately affect small investors with limited financial buffers, potentially discouraging them from long-term investing,” says Govila.
Another issue is arbitrary timing of the charges as the bank decides when to levy these charges without considering how it will impact another transaction. Sometimes lack of communication and arbitrary timing of deduction of these charges lead to low balance and which fuels another default on auto debit payment. For instance Axis Bank charged Rs 3800 just for mutual fund SIP debit returns in the month of September and charges were deducted arbitrarily in November 2023.
Shouldn’t account-holders get the cost advantage of electronic transactions?
Earlier, regular monthly debit from a bank account was done through a paper-based system. This was replaced with electronic clearance and automated clearing. It was argued that electronic clearance of funds will bring down the cost of transaction for banks and customers will be the ultimate beneficiaries. But today, investment returns continue to be penalised heavily.
“No one intentionally does this. In an event this happens, the charges should be moderate. If it happens 3 times or more, higher penal charges can be levied,” says Sadagopan.
Banks could explore options such as offering a grace period or limited free waivers for missed SIPs before imposing penal charges, says Govila. He also bats for banks sending timely reminders to investors to avoid missed payments and facilitating easy rescheduling of SIPs in case of anticipated shortfalls.
An ideal case for RBI to intervene
One big penalty on NACH return derails a year-long investment of a small retail investor. It is not uncommon to find small retail investors having multiple small SIPs running simultaneously. If the number of SIPs with Rs 500 or lesser contribution is 10 one can just imagine the loss for a small investor. It is an ideal case for the central bank to intervene and rationalise the charges related to ACH debit returns for investment, at the very least.
“Yes, the RBI should intervene to protect small investors from unjust penalties. The central bank plays a crucial role in setting guidelines that ensure fair practices within the financial sector. Intervening to regulate and standardise penal charges for NACH/ECS/SI returns on investment mandates would safeguard the interests of small investors,” says Govila.
It is in the interest of the country to have a greater number of people who are financially independent through regular savings and investments.
“Establishing a framework that considers the financial vulnerability of retail investors and imposing penalties in proportion to the default severity is essential. The RBI has the responsibility to create an environment where investors, especially those with no outstanding debts, are not unduly burdened by exorbitant charges, safeguarding their hard-earned money intended for regular investments,” says Govila.
The central bank needs to consider this issue more sympathetically in the small investors’ interest. “The regulatory authorities, including the RBI, should encourage a more lenient approach for retail investors, ensuring penalties are reasonable and commensurate with the situation” says Govila.
He suggests some points that the regulator should consider:
- Protect small investors: The RBI has a mandate to safeguard the interests of small investors. It could consider intervening to ensure that penal charges for missed SIPs are reasonable and not detrimental to investors’ financial well-being.
- Balancing interests: The RBI would need to balance the interests of banks and investors. While banks incur costs for processing failed transactions, excessive penal charges could hinder financial inclusion and investment growth.
- Potential measures: The RBI could establish guidelines or caps on penal charges for missed SIPs, mandate banks to offer a minimum number of free waivers or grace periods, and encourage banks to adopt more proactive measures to prevent missed SIPs, such as reminders and flexible rescheduling options.