Minimum Average Balance Rule: How It Works And Why Banks Need It

Many banks impose a minimum average balance (MAB) rule that requires account holders to maintain a set minimum balance on a monthly or quarterly basis.

Some banks also offer salary accounts that may waive the MAB subject to regular salary credits.

Source : ABPLIVE AI

A savings account is one of the most basic financial products that is often the foundation to building wealth. Many banks impose a minimum average balance (MAB) rule that requires account holders to maintain a set minimum balance on a monthly or quarterly basis. Failure to do so can attract a penalty, which can vary with the bank. Recently, a leading private bank increased their minimum balance limits, an announcement which has brought this rule back into focus. So, what are some reasons for the bank to impose an MAB requirement? Let’s find out. 

Helps banks reduce costs

Banks incur a variety of costs for running a savings account. These costs go towards processing transactions, maintaining ATMs, sending statements, digital banking platforms, and providing customer support, among others. The minimum balance requirement goes to ensure that the account is cost-effective to service.

Provides banks with low-cost funds

The money in your account remains with the bank until you withdraw it. These deposits are used by banks to provide loans and make investments, the returns on which are higher than the interest paid to you on savings accounts. Thus, the difference between the bank’s earnings and what it offers in returns constitutes its earnings. 

Encourages regular account use

Often, savings accounts are opened to deposit funds but are not used regularly. The MAB rule encourages customers to keep their accounts active rather than letting them become dormant. This also helps the bank maintain a steady, ongoing relationship with the customer.

Allows better financial planning for the bank

Stable deposits are a primary factor that helps banks maintain and manage liquidity. In absence of an MAB requirement, account balances may fluctuate drastically, leading to disruptions in lending with available funds. That’s why a minimum balance rule can be crucial to help the bank maintain a stable and predictable deposit base.

Penalty income is an added benefit

Penalty imposed for non-maintenance of MAB is a source of additional income for banks. However, since these penalties, in the past, have sometimes added up to become significant sums, the RBI has established guidelines to ensure these penalties are reasonable and transparent.

Helps with segmenting customers

Banks tend to offer a variety of savings bank accounts that cater to different customer profiles. Accounts with high MAB tend to offer extra benefits such as higher ATM withdrawal limits, priority service, or complimentary insurance cover. This helps banks align the cost of these benefits with the higher and more stable balances such customers maintain. Lower MAB or zero-balance accounts, on the other hand, provide basic banking services with fewer or no perks, which makes them more accessible to a wider range of customers. 

If maintaining a minimum balance is challenging for you, many banks, including small finance banks, offer zero-balance variants of savings bank accounts that you can explore. Some banks also offer salary accounts that may waive the MAB subject to regular salary credits. It is best to analyse your financial situation and choose an account accordingly, to avoid unnecessary penalties. The key is to find the account that works for you. 

(The author is the Senior Manager, Communications at BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar)