The interchange is the fee paid by the card-issuing bank to the bank whose ATM the card has been swiped at.

The Reserve Bank of India (RBI) grossly underestimated costs for revamping the country’s ATM infrastructure, while drafting circulars for the same, shows an unpublished report by the central bank and obtained through a Right to Information (RTI) application by Srikanth L. The report of the committee to review the ATM interchange fee structure, submitted on October 22, 2019, recommended that banks be allowed to charge customers for ATM withdrawals of over Rs 5,000.

The interchange is the fee paid by the card-issuing bank to the bank whose ATM the card has been swiped at. It currently stands at Rs 15 in India.

“The recent regulatory guidelines have impacted the cost of operating ATMs significantly. While it is necessary to have safe and secure banking channels and ATMs being one of the main channels for cash transactions, it is also required to understand and appreciate the cost impact of complying with the requirements,” the report said, adding, “Banks and WLAOs (white label ATM operators) should have a mechanism whereby the incremental cost incurred by them can be recovered over a period of time to ensure viability of operating of ATMs.”

The report illustrates the extent of mistaken assumptions by the central bank with specific examples. One of these is with respect to the RBI circular dated April 12, 2018, which directed banks to use lockable cassettes in their ATMs which would be swapped at the time of cash replenishment. The report pointed out that the cost per cassette ranges between Rs 14,000 and Rs 21,000, compared to the Rs 4,000-Rs 8,000 range assumed by the RBI. “This is based on the information obtained from major OEM vendors. The cost at the minimum is about 2.3 times the cost assumed by RBI,” it said.

Further, the central bank assumed the average frequency of loading cash at ATMs to be three days, whereas data from top banks indicated that it is almost daily in metros and 2.65 in rural areas, with the average working out to two days. The increase in cash holdings at ATM and in transit was estimated at 10-20%, while in actual fact, the cash holding shall be substantially more in the range 20-25%, the committee found. “The cost of increased cash holdings, on account of replacement of cash at ATM by Full Cassettes and increased operating costs for Cassettes by the Cash Management Service providers have not been factored in the cost working presented,” the report said.

Among the recommendations made by the committee, chaired by then Indian Banks’ Association (IBA) chief executive VG Kannan, was a proposal to allow banks to charge customers for every individual transaction above Rs 5,000 to discourage high cash withdrawals from ATMs. The committee also recommended increasing the free transactions at ATMs in all centres having population less than 1 million (as per Census 2011 and to be reviewed from time to time) to six per month from the existing five.

It also proposed a 20% increase in the upper cap for charging customers for financial transactions, over and above the free transactions allowed, such that it would rise to Rs 24 per transaction (plus applicable taxes) from Rs 20 at present.

A differential interchange for under-penetrated areas was another recommendation. For transactions at ATMs in all centres with population of 1 million and above, the committee proposed that the interchange be increased to Rs 17 from Rs 15 for financial transactions and to Rs 7 from Rs 5 for non-financial transactions. This shall cause an increase of about 16% on a blended basis, the report said. For transactions at usage of ATMs in all centres with population of less than 1 million the interchange should be increased to Rs 18 for financial transactions and to Rs 8 for non-financial transactions. This shall cause an increase of about 24% on a blended basis. “Most of the WLAOs also concentrate in the semi urban and rural areas, and would be encouraged to operate in this space thereby achieving the purpose of increasing ATM penetration in these areas and servicing the customers there,” the report said.

The above recommendations have been made without taking into consideration the implementation of the cassette swap, which could add another about 15% additional cost. “If it is to be implemented, then a commensurate increase in ATM usage charges and ATM interchange should be considered as appropriate,” the committee said in its report, while also recommending a review of interchange and customer ATM usage charges at stipulated intervals to be decided by RBI.