Tuesday, April 28, 2009

WHY BANKS INCREASE MINIMUM BALANCE AMOUNT IN SAVINGS ACCOUNT AND HOW TO DEAL WITH IT

With the cost of servicing customers going up for banks, the minimum balance amount to be held in savings account is being increased by banks these days.Most of the Indian Private banks now ask customers to maintain an average quarterly balance of Rs 10000 in their accounts ,up from Rs 5000 not so long ago.The foreign banks have much higher minimum balance criteria for all its savings account holders. What does this increase mean to you and how does this affect you ? Lets try and understand this and will also see how best can we deal with this problem.
How does this minimum balance criteria work? The minimum balance criteria stipulates that for every day of the quarter, your savings account should have an average balance of Rs 10000 (in case of banks where the minimum balance is RS 10000,likewise it will change with the minimum balance amount). So for example, if you have an account with ICICI Bank or HDFC Bank, where the bank asks you to maintain Rs 10000 average quarterly balance in your account, it does not mean that you need to have at least Rs 10000 in your account on every possible day in the quarter. Rather , it means that your account must have a credit balance of Rs 10000 for 90 days i.e total Rs 90,000 for 90 days. Now , lets say today you have Rs 20000 in your account and tomorrow you withdraw Rs 15000 form your account, it does not mean that you have violated the minimum balance criteria. In this case your average balance for these 2 days would be Rs 12500 (20000+5000/2)and hence you still have an average balance which is well within the permissible limits set by the bank. In essence for every dip in your balance below Rs 10000 or whatever is the minimum balance required , there has to an equal surplus for equal number of days to meet the criteria.
Why do banks have this minimum balance criteria? Banks have valid reasons for doing so. Banks spend a lot of money towards servicing your account, they send you statements through courier, support ATM networks,staff expenses when you visit the branch etc. All this costs money and hence they ask you to make a commitment of minimum amount in the account so that the banks can recover some of this cost.The money deposited in the savings account attracts a mere 3.5%interest p.a. in India and thus is the cheapest source of money for the banks.
How to deal with it? You may consider following steps:

1. Open a salary account - For all those who are salaried, they may already have a salaried account and hence wont have a problem of having to maintain minimum balance in their savings account. If you don't have one, check with your company admin or HR and get a salary account opened with a bank. Banks in order to attract bulk deposits offer salary accounts to employees of corporates where they normally waive off this criteria.

2.Have a higher balance for few days - One way of dealing with this is to keep higher balance for few days and then remove the money for use. This strategy will ensure that your average balance criteria is met while you also use your money. For example, If your monthly salary is Rs 50000 and if you keep Rs 50000 in your account for 7 days before spending it, you would have met the average balance criteria of Rs 10000 in your account for the whole month. After the week you may use up your money without attracting the penalty from the bank.

3.Get your salary/reimbursement cheque in this account - If you are getting salary cheque in some other account, I suggest get your salary cheque deposited in this account only. Also have all your reimbursements come to this account. This will prop up your average monthly balance.

4.Opting for EMI payments or investment SIPs post 15-20th of the month- Another thing to do is to choose to pay all your regular foxed payments like loan EMIS,mutual fund SIPs, insurance premium etc post 20th of the month. This will ensure that the money is in your account for first 20 days which will keep your average balance up will earn interest too.

3 comments:

  1. Rajeev, Good article to give an idea why the criteria exists, now as a consumer, my questions are-
    1. I didn't very clearly understand how the criteria works, still why do the banks charge a penalty when it goes below INR10000. ICICI did to me.

    2. Your reasons for supporting this criteria are hard to digest. Reasons like "statements through courier, support ATM networks,staff expenses when you visit the branch" don't make sense.
    AFAIK, nowadays all major banks except govt. banks who have lousy webservices, push for e-statement, it doesn't cost anything, just initial setup fee.
    Maintaining ATM network, I will give least points on that. Many ATM machines have problems like issuing less number of bills than stated. If not regular, you read quite often in the newspaper.
    Staff fee, that was present even before when internet banking was not present, as a matter of fact, it was way too much and there was very little balance reqd. Agreed that time has changed but not to this extent.

    In short, banks are not charity trust, they make tons of money, even in recession, name any bank thats in loss.
    I am not against paying for services but I am yet to find a bank that offers services that I can say top-notch.
    ICICI is major con-bank.
    HDFC is better.
    Axis Bank has pretty good customer service and the one I can bank with.
    IDBI Bank, SBI etc. etc. better not bank with them unless you have to. People run to them only b'coz they are govt. bank and money is safe but the service is very very very lousy.

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  2. Anonymous
    Freind I can understand your sentiments , but, we must not forget that Bank is a "for profit organisation" and hence they do levy all these charges. They impose penalty if one goes belwo minimum balance to ensure that people adhere to this limit else everyone will break this and then the whole point to having people to maintain minimum balance will be lost.
    And as far as money being safe is concerned , let me tell you that the money in all the banks ie PSUs and Private are insured by RBI to the extent of Rs 1 lakhs.

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