The Unused Facility Fee - from Standard Bank

**Dave A** · 05-Jun-14, 04:14 PM

I'm sure most of us see nothing unusual in being charged interest on money we borrow from the bank. But what is the view here on interest being charged on the money that you don't borrow?

This email received from my business banking manager at Standard Bank introducing the Unused Facility Fee (UFF) certainly has me pondering the concept.

Dear Valued Customer

A new fee is going to be implemented by the Bank as from 1 July 2014

The unutilised overdraft fee is going to be levied on business accounts that have a history of not utilizing it facilities to capacity.

This will also assist the owner to manage the business cash flows.

What is UFF?

UFF is a fee charged by a lender to a borrower for an unused or underutilised credit line.
An Unutilized Facility Fee is generally specified as a fixed percentage of the undisbursed loan amount.
The lender charges an Unutilized Facility Fee as compensation for keeping a line of credit opened

Reasons for the Unutilized Facility Fee introduction:

Access to an overdraft facility is provided up to an agreed limit
As a bank, we are obliged to hold capital against the entire overdraft facility, regardless of whether it is used or not
Under the new international regulatory framework of Basel III, all banks are now required to raise their regulatory capital base to improve the banking sector’s ability to absorb financial and economic stresses in order to protect all depositors
Unlike competitors, Standard Bank have not previously charged a fee, however the new regulatory environment has now necessitated the introduction of this fee

How is UFF Calculated?

Fee charged on the unutilised portion of a customer’s overdraft facility
Calculated on the daily outstanding balance of the facility
Recovered monthly
Fee will fluctuate depending on the utilization of the overdraft over the month
The fee will be charged at 1.2% of the unutilized portion of the Overdraft in any given day

Fee to be applicable to accounts based on following rule:

If utilisation is less than the maximum stipulated utilisation rate (i.e. 80%), then Charge applicable fee, else
If utilisation is greater or equal to the maximum stipulated utilisation rate (i.e. 80%) then fee = 0%.

Normal interest on overdraft will be levied.

Thoughts, anyone?

**Marq** · 05-Jun-14, 04:43 PM

So wrong on all levels.
I am sure one could invoke the CPA.

Reminds me of the Hotel Bill joke. Its time we started invoicing the banks for
for wasted time and paper dealing with their incompetence. This thing where they
just dip into our accounts for whatever charges they feel like for the month
is so wrong as well. They are entrusted with our life savings and should show more
respect rather than steal from us under the colour of the law that they have laid
out themselves.

For those who don't know the Hotel Bill joke.... here is one of its many forms:-

A husband and wife are travelling by car from Johannesburg to Cape Town.
After many hours on the road, they're too tired to continue,
and they decide to stop for a rest. They stop at a nice hotel and
take a room, but they only plan to sleep for four hours and then get back
on the road. When they check out four hours later, the desk clerk hands
them a bill for R 3,500. The man explodes and demands to know why the charge
is so high.
He tells the clerk although it's a nice hotel, the rooms certainly aren't worth
R3,500. When the clerk tells him R3500 is the standard rate, the man insists
on speaking to the Manager. The Manager appears, listens to the man,
and then explains that the hotel has an Olympic- sized pool and a huge
conference centre that were available for the husband and wife to use.
"But we didn't use them", the man complains.
"Well, they are here, and you could have," explains the Manager.
He goes on to explain they could have taken in one of the shows for
which the hotel is famous. "The best entertainers in the world perform
here," the Manager says.
"But we didn't go to any of those shows," complains the man again.
"Well, we have them, and you could have", the Manager replies.
The Manager is unmoved, and eventually the man gives up
and agrees to pay. He writes a cheque and gives it to the Manager.
The Manager is surprised when he looks at the check. "But sir," he says, "this
cheque is only made out for R1000."
"That's right," says the man. "I charged you R2500 for sleeping with
my wife."
"But I didn't!" exclaims the Manager.
"Well," the man replies, "she was here, and you could have!

**Marq** · 05-Jun-14, 04:55 PM

Remove the Reserve Bank for Starters

**Alice Rain** · 09-Jun-14, 09:12 PM

**Marq** · 05-Jun-14, 05:00 PM

Realise the problem!

**Marq** · 05-Jun-14, 05:01 PM

And then stop borrowing form the Banks.
Its the only way to solve these kinds of issues.

**BusFact** · 06-Jun-14, 01:10 PM

Originally Posted by Marq

And then stop borrowing form the Banks.
Its the only way to solve these kinds of issues.

Spot on. Not easy, but certainly the goal.

**Blurock** · 14-Jun-14, 12:01 PM

As much as I agree that banks are ripping us off, I have to side with the banks on the commitment fee or utilisation fee.

Imagine that Grandpa has to hold R100,000 in reserve for Johnny's study fees. He can not invest it and earn interest, as the fees may be required at any time. he can also not charge interest, as it has not been paid out yet. So in other words, he is out of pocket for the interest that he could have earned.

The reason for a "commitment fee" is that the Basel 111 accord forces banks to hold more capital reserves in order to protect investors. This increases bank liquidity and reduces bank leverage (debt) and risk. These reserves are "non-performing assets" in the sense that they do not generate an income.

Banks must account for the value of outstanding loan commitments so that funds are available should the borrower request them. They represent a future obligation in full, even though a percentage of the notional loan amounts will never be utilized by the borrowers themselves. This is also a guarantee that the money will be available to the borrower when required, although the fine print allows banks to get out of this commitment very quickly, as an overdraft is essentially an "overnight facility" and can be called up on short notice.

Definition of 'Commitment Fee'

A fee charged by a lender to a borrower for an unused credit line or undisbursed loan. A commitment fee is generally specified as a fixed percentage of the undisbursed loan amount. The lender charges a commitment fee as compensation for keeping a line of credit open or to guarantee a loan at a specific date in future. The borrower pays the fee in return for the assurance that the lender will supply the loan funds at the specified future date and at the contracted interest rate, regardless of conditions in the financial and credit markets. (Wikipedia)

**Marq** · 14-Jun-14, 08:59 PM

Originally Posted by Blurock

As much as I agree that banks are ripping us off, I have to side with the banks on the commitment fee or utilisation fee.

Imagine that Grandpa has to hold R100,000 in reserve for Johnny's study fees. He can not invest it and earn interest, as the fees may be required at any time. he can also not charge interest, as it has not been paid out yet. So in other words, he is out of pocket for the interest that he could have earned.

The reason for a "commitment fee" is that the Basel 111 accord forces banks to hold more capital reserves in order to protect investors. This increases bank liquidity and reduces bank leverage (debt) and risk. These reserves are "non-performing assets" in the sense that they do not generate an income.

Banks must account for the value of outstanding loan commitments so that funds are available should the borrower request them. They represent a future obligation in full, even though a percentage of the notional loan amounts will never be utilized by the borrowers themselves. This is also a guarantee that the money will be available to the borrower when required, although the fine print allows banks to get out of this commitment very quickly, as an overdraft is essentially an "overnight facility" and can be called up on short notice.

Definition of 'Commitment Fee'

A fee charged by a lender to a borrower for an unused credit line or undisbursed loan. A commitment fee is generally specified as a fixed percentage of the undisbursed loan amount. The lender charges a commitment fee as compensation for keeping a line of credit open or to guarantee a loan at a specific date in future. The borrower pays the fee in return for the assurance that the lender will supply the loan funds at the specified future date and at the contracted interest rate, regardless of conditions in the financial and credit markets. (Wikipedia)

See post #4 - thats how it really works, not like they would like you to believe it works.

The banks are not out of pocket at all.
If you discuss the commitment fee with your banker, chances are as I have found out, they cannot tell you much more that the basic letter and do not know anything about the things you mention in this post.
Baffled by BS.