Savings Account is an integral part of everyone’s lives. It helps in carrying out transactions and keeping your money safe. Nowadays, it is easy to open a savings account as one can open savings account online and complete the KYC process through video-based interaction. As a result, many people have more than one savings account under their name. Moreover, individuals may have to open a new bank’s salary account at the time of joining a company. If salary is not credited in the account, the salary account is converted to a regular savings account.
While more than one savings accounts can help to better plan your finances, many individuals may find it hard to maintain the mandated minimum average balance.
Most regular savings accounts have a minimum average balance (MAB). It is the minimum balance that accountholders need to maintain on a monthly or quarterly basis. Depending on the shortfall, banks will levy a penalty on the accountholder. The fee on non-maintenance of minimum average balance will vary among banks.
Do you have multiple savings accounts and your bank debits the non-maintenance fee from your account at regular intervals, then this article is for you.
Moreover, did you know that you don’t have to keep the minimum balance all the time to avoid paying fee?
What is minimum average balance?
Monthly Average Balance or MAB is the sum of all the closing balance in a month which is divided by the number of days in the particular month.For example, if the minimum average balance is Rs.5,000, it is not mandatory to keep Rs.5,000 at the beginning and end of the month. You have to manage a monthly average balance of Rs. 5,000. You may have less that Rs.5,000 on any given day but the average balance in the month has to be more than Rs.5,000.
The charges for not maintaining the average balance will differ from bank to bank, the type of bank account and the location. Savings account for high net worth individuals and urban branches charge a higher average minimum balance.
How is it calculated?
It is important to know how banks calculate your minimum average balance as you don’t have to pay penalty for non-maintenance of average balance.
Broadly, banks use two ways to calculate minimum balance of a customer. They are:
- Monthly Average Balance (MAB)
The average monthly balance is the average of sum total of daily closing balances of the account. It is calculated by dividing the sum of the outstanding closing balance of each day in a month, by the number of days in a month.
E.g. If you had Rs.10,000 for the first ten days of the month, the total amount in the first ten days will come to Rs. 1 lakh(Rs.10,000*10). The entire process will be repeated in this fashion forsubsequent days. Any deposit or withdrawal from the savings account will be calculated accordingly.
Let us take an example,
Bank X has a monthly average monthly balance of Rs. 10,000.
This is how the average monthly balance will be calculated for the month of June.
On 1st June, the balance in the account is Rs 10,000.
On 7th June, withdrawal of Rs 3,000 take place.
On 15th June, deposit of Rs 5,000 takes place.
From 1st June to 7th June, i.e., 6 days, total balance will be Rs (10,000*6) = Rs 60,000
From 7th June to 15th June, total balance will be Rs (7000*7) = Rs 49,000
From 15th June to 30th June, the total balance will be Rs(12,000*16) =Rs.1.92 lakh
So, total balance comes to Rs 3.01 lakh and the average for 30 days will be Rs. 10,033. This is above the required minimum limit and as a result no penalty will be levied.
In short, Monthly Average Balance or MAB= Sum of all the closing balance in a month / Number of days in that Month
2) Average Quarterly Balance (AQB)
Average Quarterly Balance is similar to Minimum Monthly Balances but now a quarter is taken into account instead of days. While calculating MAB, banks consider the days of month as total number of days in the particular month where as in AQB, banks take a time frame of 90 days that makes a quarter.
A lot of banks have gravitated from AQB to MAB. Hence, you need to check process followed by your bank.
However, you should remember that all the days are included including the bank holidays. The second point that you should remember is that the balance is end of day balance and not the average balance of that day. For example, if you have Rs. 10,000 at the beginning of the day and it was Rs.2,000 at closing, bank will consider Rs.2,000 as the day’s balance and not the average.
The penalty also varies on the shortfall of the average minimum balance. The higher the shortfall of the minimum average balance, the higher will be the penalty levied by the bank. E.g. banks have a slab of shortfall of less than 50%, 50%-75% and more than 75%.
Now that you know how the minimum average balance is calculated, you may want to know why banks charge penalty on the non-maintenance of average balance. Many banks do so to cover for the maintenance of the bank account and few reports have also suggested that banks are doing so to make up from the losses of bad debt.
Here’s how to avoid paying penalty for a not keeping up with the average minimum amount:
Open a Zero Balance Account
Some banks like Kotak Mahindra Bank offer Zero Balance Saving Account. In such zero balance savings account, there is no need to maintain any minimum balance in the bank account during a month or a quarter. There is no penalty for keeping zero balance in your bank account.
These zero balance accounts carry the same facilities as a regular bank account with debit card, cheque books, internet banking and cash deposit etc.
In order to open a Zero Balance Savings account, you need to provide basic KYC (Know Your Customer) documents. You can easily open an online zero balance savings account with your PAN and Aadhaar card.
Being little smart:
Just because the average minimum balance is Rs.5,000, it does not mean that you have to maintain a daily balance of Rs.5,000. You can easily maintain the average balance by keeping Rs.55,000 for 3 days. It is because Rs.55,000*3 = Rs.1,65,000 divided by 31 days is Rs.5,302 which is above the average monthly limit.
In case, you are getting penalty charges from your bank account for not keeping the average balance, now will bea good time to switch to a zero balance account.