For most of the people who were born before the 90s, opening a bank account was the gateway to financial indoctrination. Remember how you would scribble everywhere to make your signature look cool, only to be warned that it must be the same at all times? Most of us would probably still remember our first bank branch. But the good news is that the children of today may not have to wait as long as we had to, for opening a bank account. Following the recent guidelines by the Reserve Bank of India (RBI) in May, several banks have launched savings accounts for kids above the age of 10. These accounts can be operated independently by kids without any supervision from parents. All you need is to send him or her to the nearest branch to set them off on the path of banking.
The RBI guideline comes in at a time new generation kids need financial education more than ever. They need to be taught how to manage money as sooner or later they will be exposed to the use of credit and debit cards. The early they learn how to handle these, the better it will be for parents. Realising the need, the RBI has come out with guidelines on minors' account. It could be a first step to teach your kids the value of money. It will also help you save for the future while teaching them the basics of managing money.
What's on offer?
The concept of opening a kid's bank account is not new. But until now, accounts opened in the name of the kids were under the guidance of the guardian. New minor-operated accounts can be managed independently without supervision of parents. They are authorised to sign cheques and even transfer funds online. A child can visit the nearest branch with requisite documents and can open their account within a couple of days. While all banks provide the basic kit-a debit card, cheque book, and mobile alerts- the other facilities may vary from bank to bank. The minimum documents required for the know-your customer (KYC) process also varies from bank to bank. These accounts, generally, come in two variants. You can choose the account depending on the extent of control you want to give your child in terms of spending. For example, ICICI Bank's 'Smart Star Savings Account' with guardian consent has a debit transaction limit of Rs 2 lakh per annum while one without guardian consent has a debit transaction limit of Rs 50,000 per annum. If the debit transaction limit is breached during the year, the account gets frozen. You can choose the account depending on how much transaction limit you want your child exposed to.
The minimum balance requirement also varies from bank to bank. For instance, in ICICI Bank's Smart Star, a child needs to maintain a monthly balance of Rs 2,500 while in Federal Bank's Young Champ she has to maintain a quarterly balance of Rs 1,000 (It can be waived in Federal Bank if parents' account is opened along with the kid's account). SBI's PehliUdaan is a zero balance savings account.
Apart from helping children in understanding the concept of maintaining quarterly balance, you also need to inform them about charges imposed on non-maintenance of the balance, which in ICICI's case can be Rs 100 per month. Also, teach them how the average balance is calculated. Exposing these terms to your child would help them in life.
For ATM transactions the rules are same as for regular savings account. The first five transactions in a month are free, above which ATM of other banks charge Rs 20 per cash withdrawal. For non-financial transactions, such as balance enquiry, it is Rs 8.50 per transaction. Moreover, just like your regular savings account there might be certain limits on cash deposits and withdrawals. For example, ICICI Bank allows four free cash transactions per month in the same city, after which they charge Rs 90 for each transaction. Not only on number of transactions, there is a cap on value as well. For example, you cannot deposit more than Rs 50,000 per day from another city. Tell your kid to go through schedule of charges before opening an account. Tell them how much bank would charge if they do not maintain a minimum balance. Also, how processing charges are deducted if they transfer their funds online from one account to another.
Money gives us a sense of power but at the same time it also inculcates a sense of responsibility. Rahul Soota, executive director, mymoneymantra, a financial distribution company, says, "Kid's accounts teach children how to be careful with money. It helps parents in teaching kids about finance."
Checks and balances
Are minor-operated accounts really a right way to teach kids about finance? Yes, say experts. Manish Jain, a Gurgaon-based financial planner says, "Parents, generally, are skeptical about letting their child handle money. But it is our job to make them responsible and teach them at a young age about finance." Moreover, to keep a check on accounts banks impose withdrawal limits on debit cards. For example, while in SBI Bank and ICICI Bank a child cannot withdraw more than Rs 5,000 in a day, Federal Bank has the per day limit of up to Rs 2,500. Jain further says, "Parents can also check the passbook or an online account of their child fortnightly to understand where and how much they are spending. "
What to do?
It is good to teach children basics of finance as early as possible. Like, at the age of five to ten we can let them purchase things which they want, under our supervision. This way they will learn the role of money in life. By the time they are ten years old, try to make them understand the value of money. At this stage, opening a bank account can bring a sense of responsibility to the children.
Once your child learns basic banking introduce him to investment options. They would learn how interest is earned in a savings account. Most importantly, it would encourage children to start saving early and reap the benefits of compunding.