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A to Z of Minimum Average Balance

Tired of paying penalty for non-maintenance of average minimum balance? Here’s are some alternatives.

Neha woke up with a jolt on a Monday morning. There was a debit message from her bank account that she rarely used. She panicked and didn’t know what to do. Finally, she called up the call centre of her bank when she got to know that her bank account was debited due to non-maintenance of the average minimum balance of Rs.5,000. 

If you too had been a similar situation, read this article to know what average minimum balance is and how you can save yourself from paying the penalties.

What is Minimum Average Balance and how is it calculated?

Monthly Average Balance or MAB is the average balance that you need to keep in your savings account to avoid paying penalty. Minimum average balance can be monthly or quarterly. Although minimum monthly average is commonly used, few banks need quarterly average balance. 

However, the calculation of the minimum monthly average balance and quarterly average balance is the similar.  

In case of the monthly average balance, to come to the minimum average balance, you need to add all the closing balances in a month after which it is divided by the number of days in that particular month. The number of days includes working as well as the non-working days. 

However, there is no criteria in case of basic savings account, zero balance accounts and online bank accounts. The minimum average balance varies with the different saving account and the branch locality. For example, a specialised savings account or savings account that caters to the high networth individuals will be higher than a normal savings account. Also, the savings account opened in a rural or semi urban area will have lower minimum average balance than a bank branch in the urban areas.

The penalty for not keeping the required minimum balance is also dependent on how short you are in maintaining the average balance. You will be charged more if you are more than 75% short in keeping the minimum balance than someone who is 25% short.

Let us understand how the average balance is calculated:

Monthly Average Balance or MAB = Sum of all the closing balance in a month / Number of days in that Month

For quarterly average balance(QAB), the similar calculation is applicable for a quarter of 3 months. 

QAB = (Total of all the EOD closing balance)/(number of days in quarter)

Let us take an example and see how monthly average balance is calculated:

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 monthly balance is Rs. 10,033. Hence, we see that this is above the required minimum average balance and no penalty will be levied.

No one wants to pay a penalty for not keeping the average monthly requirement. Here are some of the ways that can help you to avoid paying penalties.

Open a zero balance account: 

Opening a zero balance account kills the very need to keep a minimum average balance. You can easily open a zero balance account like Kotak 811 through online and app banking. It only takes a couple of minutes to get a zero balance up and running. The entire opening process is entirely paperless. However, you may need to visit the bank branch to get your KYC done. 

Use Auto-Sweep Options

Now-a-days many banks offer the facility of auto – sweep facility which lets the bank account holder to link savings and fixed deposits. Here, the holder has the opportunity to set automatic transfers from savings to FDs and vice versa.    

You can set a limit say Rs.10,000. If the balance goes above Rs.10,000, then the amount above the limit is automatically deposited in a savings account and vice versa. In this way, auto sweep facility can help you to maintain the minimum average amount.  Getting penalty charges from your bank is one of the unnecessary bank charges. To get rid of the minimum average requirements forever, switch to zero balance accounts. 

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