RBI Allows Minors to Operate Savings Accounts - Is This Good or Bad

1. RBI Allows Minors to Operate Savings Accounts - Is This Good or Bad

2. Exit piggy banks; enter the real world of banking. It is never too early to transit from a life of innocence to a world of experiences, so seems the latest buzzword. Children aged 10 and above can have their personal bank accounts and execute transactions such as withdrawal, transfer and deposit of money, thanks to new guidelines issued by the Reserve Bank of India (RBI). Banks are also free to offer additional banking services such as internet banking, ATM/debit cards and cheque books to the minors.

3. Earlier, the Reserve Bank only allowed minors to have fixed deposit bank accounts under the supervision of mothers. The central bank has, however, made it mandatory for banks to abide by risk management norms and for minors to re-confirm their account balances after attaining adulthood.

4. Preparations • RBI's action on permitting savings accountfor minors may indeed be enticing, but it is important to be well-prepared before taking the plunge, if at all.

5. Do your homework • There is no replacement for proper due diligence. It is incumbent for parents to understand the minimum balance requirements, service charges and withdrawal limits, among other things, before venturing to open a bank savings account for the kids.

6. Engage the child • If the initial analysis surrounding the bank and account-related safeguards and facilities are encouraging, one can safely take the next step in opening the bank account. Accompany the child to the bank, explain the nitty-gritty of account opening, and facilitate the child's interactions with the bank officials and participation in completing the necessary paperwork.

7. Learn the Ropes • The initial years of life are occasions for learning financial management skills and imbibing necessary saving habits for the future. Setting goals and charting a detailed plan of action are a necessary part of this process. The parents should inculcate the importance of setting achievable goals and working in a calibrated manner towards realizing the desired outcomes. The children should be encouraged to draw a detailed roadmap for achieving their financial targets. For example, a child can be led to make the desired purchase by saving in installments each month and capitalizing on the power of compounding. The monthly allowances, and monetary gifts received on birthdays and festive occasions would contribute to the saving corpus.

8. Be Alert • It is important to keep a tab on the child's account management behavior, including frequency of withdrawals and spending patterns, and suggest corrective steps if and when necessary. It is a good practice to discuss the quarterly bank statements, including the balance, interest earnings and latest transactions, with the child.

9. The Good • The policy push for minor accounts is a stepping stone to financial inclusion, promotion of monetary literacy and strengthening the banking penetration levels in the country. • Children will gain real-time education in money matters due to an exposure to services such as internet banking, Automated Teller Machines, debit cards and cheque books. Knowledge of banking processes will inculcate financial responsibility and a mind-set oriented towards savings. Students can translate their curiosity about financial matters and hands-on knowledge into professional careers in the financial domain. • Parents, especially in big cities, should be able to breathe easy as children themselves manage their monthly money allowances. • A culture of banking and paperless transactions will contribute to a reduction in cash dealings and thereby result in a gradual decline in black money.

10. The Bad • Minors as young as 10, are ill-equipped to comprehend the complicated world of finance and grasp the minute details of monetary transactions. Some financial predators may easily lure the gullible minors to surrender their hard-saved cash. Some minors themselves might find ways of siphoning off cash from the accounts of their school friends. • Cheque books and withdrawal slips are also sitting ducks for frauds as some banks do not differentiate between the signatures of child savings account holders and adults, making the accounts susceptible to a possible misuse. And yet when fraudulent transactions take place, these very banks would have no qualms in holding the parents accountable for any financial losses.

11. The provision of separate login IDs for minors, carries the inherent danger of losing and misuse of misplaced or stolen passwords, as also increases the vulnerability to phishing and get-rich-quick scams. • The new-found financial independence could also draw the children into bad company and a vortex of undesirable activities.

12. Precautions • Safety measures are a must, especially when it comes to online transactions. One may opt for banks that allow the account holders to set withdrawal and spending limits on the minors' debit and ATM cards and limit the account facilities as such measures would restrict the quantum of spending and lead to a rise in savings. It is a good practice for parents to prescribe upper limits so as to prevent net-savvy children from spending excessively on online purchases.

13. Banks that have liberal policies on balance requirements are good options as the account holders do not have to burden themselves to maintain a minimum amount of money in their savings account. It is pertinent to note that banks do not relax the penalties imposed for violating the minimum balance requirement even if the account holder happens to be a child.

14. The minor accounts should ideally facilitate financial discipline not only in the targeted children, but in parents themselves. Parents must be unwavering in looking for any red flags underlying the child's spending and saving behavior. They must keep track of the child's spending behavior by using the internet banking facility and account statements. Banks that do not allow online transactions may in fact be a blessing in disguise. • The school curriculum should incorporate lessons on financial education to create financial awareness among the minors.

15. Conclusion • The RBI undoubtedly had the best of intentions in opening the door of banks to minors. But the decision on availing the minor account facility should be left to the discretion of parents (without business-driven intervention on the part of banks). A careful deliberation should take into consideration the prevailing socio-economic situation of the family and the personality of the child, and balance the good and the bad, the pros and cons as stated above. A huge responsibility indeed for the major stake holders, i.e. parents and banks!

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