Minimum average balance explained: How banks calculate and penalise customers

Millions of ordinary people manage their small savings, pensions, scholarships and salaries through savings bank accounts. Most of them have little idea what a minimum balance or “minimum average balance” means. They often do not know how it is calculated or what penalty is charged if the balance falls short.

Banks are collecting even small amounts from such accounts as penalties for not maintaining the minimum balance. It is not fair to impose these charges simply because the account does not hold the required amount. Lakhs of people see the banking system as a safe and convenient way to manage the fruits of their labour. Yet, some institutions have turned banking into a burden by imposing unnecessary fees and penalties.

Recently, a leading private bank set a minimum balance of Rs 50,000 for savings bank accounts opened after Aug 1 in metro areas. This required an average balance of Rs 50,000 to be maintained in the account each month. After widespread protests, the penalty amount was reduced to Rs 15,000 in metro areas. The Reserve Bank of India says it has issued no specific instruction or regulation on minimum balances in savings accounts.

Minimum average balance

This is the minimum amount account holders must maintain in their savings bank accounts to avoid penalties. It is calculated by dividing the total daily balance in the account by the number of days in the month. Even if the balance is low on some days, a higher balance on others can meet the requirement. Some banks calculate this on a quarterly basis. The minimum balance varies according to the type of account and the branch location, rural, semi-urban, urban or metro. Banks set higher minimum balances for current accounts.

Most public sector banks in India have waived the minimum balance requirement. The State Bank of India, the country’s largest lender, waived it during the COVID period. The requirement remains strict in private banks.

Why a minimum balance?

• To control banks’ operating costs.
• To ensure banking facilities and services are effective.

If there is no minimum balance

• A penalty is imposed based on the shortfall, ranging from Rs 150 to Rs 600 per month, or up to six per cent of the deficient amount.
• If the balance remains below the limit, services such as free cheque books, demand drafts and debit cards are suspended until the balance is restored.
• The account may be frozen after a set period.

(The writer is deputy secretary in the state finance department.)