Average Minimum Balance

Maintaining it is a norm; breaching it invites penalty

SAJAD BAZAZ
Srinagar, Publish Date: Sep 18 2018 9:41PM | Updated Date: Sep 18 2018 9:41PM
Average Minimum BalanceRepresentational Pic

While hurrying myself on way back to home after a routine hectic work schedule an SOS call from a close acquaintance forced me to stop midway. The distress call was about an SMS from his bank. All his family members including himself were in ordeal as a late evening message from their bank was advising them to maintain minimum balance in savings accounts by the end of this month to avoid penal charges. They knew their accounts were having good balance and now the content of the message had unnerved all of them. They were fearing ‘swindling’ of money in their accounts.

Even as I tried to make him understand that the message from the bank was also reading “Please ignore if balance is already maintained”, he insisted to help him to cross check whether their amount in the accounts stands there or not. I was yet to think of a way out to convince my acquaintance that all is well in his accounts, I received yet another message flashing on my cell phone from a friend conveying receipt of the same kind of ‘warning’ message from the bank and that had irritated him. Calling such ‘maintaining minimum balance requirement’ messages as harassment, he wanted the banks not to indulge in such type of messaging in future.  

In the modern banking practices, maintaining average monthly or quarterly balance (AMB/AQB) in saving deposit accounts is a norm. This minimum balance criterion is an amount which an account holder is supposed to keep in the account on a regular basis. Actually, banks incur cost for maintaining and servicing the deposit accounts, especially savings accounts. These charges are to be recovered, and applying ‘average minimum balance requirement’ norm to the savings accounts is a smart move by the banks to recover such maintenance charges. 

Globally, it is one of the most widely applied norm to generate revenue by any bank. An accountholder shouldn’t get surprised if he/she finds his/her savings account closed if AMB or AQB is not maintained over a period of time. The balance in the account would be eaten up through regular penalties. Some banks don't close the account, but create negative balance in the savings account by levying charges for non maintenance of minimum balance. 

Notably, in AQB mechanism, an accountholder has an opportunity to cover AQB despite being on borderline of the breach. Their balance may be swinging on and off below minimum balance requirement during the month but at the end they can manage AQB requirement. Under AMB criterion, there is no chance of swinging of balance on and off below the minimum balance norm. There are banks who now stick to AMB to get more and more customers into the penalty net on account of non maintenance of average balance.

Basically the concept of average minimum balance requirement has the Reserve Bank of India backing. In December 2002, the RBI while expressing concern over the non uniformity in the approach of banks on the issue of ’minimum balance requirement’ advised the banks to inform customers regarding the requirement of minimum balance at the time of opening the account in a transparent manner.  The apex bank had even directed the banks to intimate the account holders about any subsequent changes in this regard. 

Issue of levying penal charges came up for discussions in November 2014 and the RBI in a circular stated that that banks should not take undue advantage of customer difficulty or inattention. The RBI while referring to the recommendations of Damodaran Committee on customer service in banks, directed the banks that ‘in the event of a default in maintenance of minimum balance/average minimum balance as agreed to between the bank and customer, the bank should notify the customer clearly by SMS/ email/ letter etc. that in the event of the minimum balance not being restored in the account within a month from the date of notice, penal charges will be applicable.’

So, in the backdrop of RBI directives, banks have a mandate to levy charges for non-maintenance of minimum balance in the account. However, the charges are to be reasonable. At the same time account holders also need to understand that breaching average minimum balance requirement would cost them. So, what is the hitch in falling in line and save money? Why can’t banks also limit services available on such accounts where there is breach to those available to Basic Savings Accounts and restore the services when the balances improve to the minimum required level?

 

(The views are of the author and not that of the institution he works for)

 

 

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