Banking commission as a tool to regulate the relationship with clients

One of the most urgent problems of modern Kazakhstani banking business is its social orientation. The significance and impact of Second-tier Banks (STB) on socio economic development of the country have been discussed a lot, but a few steps in this direction have been taken. It is high time for the government intervention in the process of organizing relations with loan customers, especially with individuals.

In July 2016 the National Bank of Kazakhstan reduced the number of commissions starting from 40 to 11 items charged by commercial banks while granting credits to their clients. Now, the calculation of the effective interest rate on a bank loan does not include such payments as: loan account set-up and control fees, loan servicing fees. Indeed, if we discover the theoretical nature of these types of bank commissions, we can notice some discrepancy among the above mentioned examples. The law allows the banks to charge a commission for banking operations. Banking is, first of all, realization of banking operations [1]. On the other hand: the set-up and maintaining of the loan account is not a banking operation, but a financial procedure, which is necessary to the bank for the sustenance of the internal accounting of transactions. It is not the client but the bank that needs these accounts. These accounts are known as “intrabank” and allow keeping a record of the lent funds on the bank balance sheet. Payment Act confirms this fact. Thus, charging a transaction fee from a client is not valid.

The similar issue arises with the commission for loan servicing. Commissions are known to be charged by the bank for specific services rendered. However, there has never been such an operation as “loan servicing” because, while obtaining the service, a client does not see any product or result of the operation. The whole list of transactions, which are charged with commissions, implies the very service. Each item is assigned with its commission. What is the main reason of commissioning the whole amount of transactions? Moreover, any service is carried out for meeting customer’s needs? Still, for meeting this need he pays the interest on the loan. In fact, loan servicing is its proper expression in financial balance of a bank, correct calculation of the interest and remaining principal balance, calculation of commissions. At the same time, it is necessary to the bank itself. In practice, the courts also took into account the given arguments and considered the payment of such commissions illegal.

In "On Approval of the List of Commissions and Other Fees Related to the Issuance and Maintenance of Bank Loan and Microcredit Granted to an Individual Taken into Account when Calculating the Annual Effective Interest Rate", designed by the Board of the National Bank of the Republic of Kazakhstan, dated May 30, 2016 № 134 they provide a complete list of such commissions:

• for consideration of applications and loan or micro-credit documents;
• for arranging loans and microcredits;
• for issuance of loans, microcredits, including the transfer of money on the loans, microcredits for their intended purposes as defined by the contract of bank loan or the loan contract;
• for opening and maintaining of current accounts related to loan servicing;
• for changing the conditions of loans and microcredits such as:
• a repayment schedule;
• loan currency;
• an interest rate;
• a method of loan or micro-credit repayment;

for consideration of the issues on:

• changes of the conditions related to a borrower (co-borrower), a guarantor (surety) on the initiative of a borrower (co-borrower) or a guarantor (surety);
• changes of the conditions of loans or micro-credits collateral encumbrance, as well as the replacement of collateral subject;
• replacement of a mortgagor;
• issuing the documents of title on the loan, being stored in a banking history, at the request of the client;
• issuing the certificate of consent for registration (deregistration) at the place of individual residence at the request of the client, on the legalization of alterations, new construction works, additions made on the territory of the collateral;
• provision of services on registration of property rights and (or) a pledge of the property set into operation in case of changing a mortgagor;
• provision of services on changing the purpose of real estate, the division of land into shares;
• issuance of certificates, at the request of the customer, for permission to replace the registration number of a vehicle, which is a collateral; for renewal of the certificate of vehicle registration; for restoration of lost documents of the vehicle;
• customer payments in favor of the insurance company, if the beneficiary under an insurance contract is a second-tier bank, an organization carrying out the certain types of banking operations (hereinafter the bank), a microfinance organization;
• customer payments to the guarantor (surety) for obtaining the guarantee (surety), to the evaluator for estimation of the pledged property;
• customer payments to the organizations (intermediaries) that provide services to the bank or a microfinance organization which attracts new customers, verifies the documents submitted by clients on compliance with the terms of loan issue or a microcredit, the transfer of customers’ documents to the bank or a microfinance institution, receiving payments and transfers from the bank clients or a microfinance institution for repayment of loans and micro-credits;
• for issuing the certificates on loan or micro-credit debts, at the request of the client;
• for partial (full) early repayment of the loan or microcredit.

This list was compiled on the basis of the most common fees charged by the banks. However, in our opinion, this list should be reviewed [2].

“Law on Banks and Banking” allows the banks to charge commission, independently set STB. On this basis, the above ordinance reviews only the list of commissions in case of crediting, but cancellation of the collection of other types of commissions can be done only in a legal way. The banks are expected not to contradict the declared clientoriented policy. It is important to note that even before the introduction of the ordinance, a number of banks, including JSC "Eurasian Bank", JSC "Kaspi Bank", as well as Kazkommertsbank, came to the decision to reduce the commission list. That proves that the banks themselves are ready to meet the customers’ requirements in terms of reducing the cost of credit services. However, the bank will "hit their profits" because just commissions contribute 20-40% of their income per year (for example, the commission benefits of Kazkomand Kaspiare equal to 34%) [3,4]. Would not such a measure of National Bank cause a new wave of increasing interest rates on loans? Practice will show.

The National Bank should consider the issue of prohibition of any fees associated with issuing and servicing the loans. The only profit that you can collect from the borrower is the interests on the loan. They reflect the very essence of the loan and must cover all the costs associated with issuing and servicing the loan. The institutions, that protect the bank clients’rights, have been offering such policy. However, commercial banks are resisting this approach because, then, they lose a significant part of their income. Thus, we can say that today's measure to limit the commission rate is some kind of compromise.

On the other hand, the statutory loan fee reflects the cost of money lent for a temporary use to the borrower. Therefore, to cover the cost of servicing the loan only by paying the interest is not always appropriate. In the process of working with a credit the bank fulfills a number of actions that can be regarded as an independent service of the bank. If a borrower does not compensate the costs for this service, they must be attributed to the bank profits. As a result of such actions, the financial managers of the bank will have to make a decision to reduce the interest on the passive operations, in order not to lose a significant portion of the profits.

According to the example, you can draw a parallel with the formation of prices for goods and services. Their price includes the production and management costs, energy costs, and advertising. During the production of goods a manufacturer does not differentiate all the costs for the parts and does not offer the consumer any specific benefits for a certain price. As it is impossible to produce the goods without including all the expenses in its price, so one cannot receive a credit without processing a credit application, or reserving the funds, or insuring a client, or opening an account, etc.

Thus, we note that the main criterion for the application of each particular commission should be the notion of bank service validity provided by the bank in both cases – apart or with a credit. Here we can consider consulting on loans and calculations, assistance in preparing the documents.

For example, the company wants to get a loan and applies to the bank. The bank analysts begin to analyze the client's financial position, considering his application for a loan. On the one hand, in this case the borrower does not receive any services for himself, but he pays he commission. On the other hand, the bank carries out the implementation of a large amount of analytical work, while utilizing both time and labor costs. The bank works out the conclusion on the borrower's solvency. It takes more than one day to carry out the service, and the plan of actions is specific in each case. The bank demands the payment for these services. This is confirmed by the experience of foreign countries.

However, without signing a bank loan agreement, this work does not make any sense. The conclusion is that the commission needs to be charged. As a banking product for this service, you can offer to make up a conclusion that will reflect the assessment of the financial condition of the company. Such a conclusion would be useful for financiers and business leaders during the organization of financial management.

In addition to the costs and refinancing rates for a loan, the timing and the sum affect the credit. Reference books on banking often offer an idea to divide all banking transactions (for which the commission is assumed) into two categories: related and not related ones to the subject of the loan agreement, but, one way or another, related to its provision [5].

The price rates of the bank on the loan agreement are assigned according to the following criteria: a reason of charging, a scheme of payments, the impact of early repayment of the loan, the procedure of determining. Thus, the interest is only one element of the bank rate. Along with the previously mentioned commissions, which have been attributed to the interest or compensation, in a foreign law, there are fees charged for specific services other than credit. Thus, the commission for the consideration of the loan application, when it is paid to the bank without further extension of the credit, according to the German jurists, is a payment for information and consultancy agreements. The commissions for cash management services, application / receipt of cash at the bank (or ATM) can be viewed as the payments under the contract for onerous provision of services [6].

Thus, according to the Banking Law in Europe, the credit price is equal to the sum of all the expenses, interest, commissions and other payments of all kinds, which the customer pays within the terms of the loan agreement. In addition, the associated costs for a credit, such as drawing a contract for the services or insurance bonuses, must be included in the cost of credit [7].

Limiting the bank costs, associated with the provision of the loan, may be realized by public legal actions of general character that does not depend on the individual borrower. It is necessary to distinguish the establishment of particular interest and commissions, in respect of which there is a general principle of freedom of contract, and informing the borrower of the designated interest and commissions which are claimed to be absolute transparent, even before the drawing of the credit agreement.

Recognizing the borrower as an unreliable client and the imposition of additional mechanisms of legal protection are justified only in respect of individuals. As far as legal persons are concerned, such a legal regime is not caused by neither any necessity (for example, when it comes to entrepreneurs and commercial legal entities), nor worthiness, given that, virtually, all entities have a legal service or lawyers, which, by their professional status, must be able to provide the necessary legal assistance.

The position of the bank depositors is vulnerable because their percentage remuneration is always affected by any percent restrictions on active operations, as they, to some extent, lead to the bank losses, and, as a result, to the losses of depositors [8,9]. Therefore, when discussing the issue of weaknesses, we should compare the borrower not with the bank, but with a depositor, bearing in mind that, in the end, the bank has no other source to cover their costs[10,11].

Summarizing all the above, it should be noted that it is extremely important for commercial banks to build such relationships with the client on the issue of collecting fees. The very terms would satisfy the optimum requirements from the bank in respect of the loan costs and obtaining a profit and from the client that could bring income to the bank and meet their financial needs. Only the very bank will be called a customer-oriented one with effective functioning in the market of banking services.

REFERENCES

1. The Law of Republic of Kazakhstan dated August 31, 1995 № 2444 “On Banks and Banking Activity in the Republic of Kazakhstan” (amended on 26/07/2016). (in Russian)
2. Resolution of the Board of the National Bank of the Republic of Kazakhstan dated May 30, 2016 № 134 “On Approving the List of Commissions and Other Fees Related to the Issuance and Maintenance of Bank Loans and Micro-credits Granted to an Individual, Taken into Account when Calculating the Annual Effective Interest Rate”. (in Russian)
3. The official website of JSC "Kazkommerts bank» http://www.kkb.kz/
4. The official site of JSC «Kaspi Bank» http: ///www.kaspi.kz
5. Gilep D. Kommissionniye platezhi pri kreditovanii // Khozyastvoipravo. 2008. № 3; Ivanov O.M. Stoimost kredita: pravovoye regulirovaniye. Moscow, 2012.p. 282. (in Russian)
6. Maximova S.A., Olejnik O.M. Bankovskiye kommissii: teoriya i praktika ispravleniya oshibok // Vestnik Federalnogo arbitrazhno gosuda Moskovskogo okruga № 4. 2013. p.80-92. (in Russian)
7. Ivanov O.M. Dualizm tsenoobrazovaniya v kreditnom otnoshenii // Bankovskoye pravo. 2012. № 1. (in Russian)
8. SarbashS.V. Ispolneniye dogovornogo obyazatelstva. Moscow, 2005, p 370. (in Russian)
9. Grant R.М. The Resource-Based Theory of Competitive Advantage: Implications for Strategy Formulation // California Management Review. 1991. Vol. 33, №3. P. 114-135.
10. Mintzberg H., Quinn J.B. Reading sin the Strategy Process. 3rd edition. New Jersey: Prentice Hall, 1998. 240 р.
11. Boyd, W.L. Customer Preferences for Financial Services: An Analysis / W.L. Boyd, M. Leonard // International Journal of Bank Marketing. -1994. -Vol. 12, № 1. -pp. 9-15.