How Banks Calculate Minimum Balance in Savings Accounts

Calculation of Minimum Balance in Savings Account by Banks

Many banks ask customers to maintain a minimum balance in their savings accounts. If the required balance is not maintained, there is a chance for the bank to impose a penalty. But many customers do not know how banks calculate minimum balance.

In this article, we shall discuss what a minimum balance is and how banks calculate it, such as Average Monthly Balance (AMB) and Quarterly Average Balance (QAB).

What Is Minimum Balance?

The minimum balance is the amount that a bank wants its customers to maintain in the bank's account. It depends on many factors such as bank, account, and branch.

For example, a bank can set the minimum balance as ₹5,000 for its savings account customers.

Definition of Average Monthly Balance (AMB)

Average Monthly Balance (AMB) is the average balance maintained in the account throughout the month.

Formula

AMB = Total Daily Closing Balance of the Month ÷ Number of Days in the Month

Example

Consider that the customer maintains the following balance:

• ₹5,000 for 15 days
• ₹3,000 for 15 days

Calculation:

(₹5,000 × 15) + (₹3,000 × 15) = ₹120,000

AMB = ₹120,000 ÷ 30

AMB = ₹4,000

If the bank's required AMB is ₹5,000, the customer can be imposed a penalty.

Definition of Quarterly Average Balance (QAB)

Instead of AMB, some banks use Quarterly Average Balance (QAB).

A quarter is made up of three months:

• April - June
• July – September
• October - December
• January - March

The bank calculates the average balance maintained in the entire quarter rather than one month.

Example:

Monthly Average Balances:

• April - ₹4,000
• May - ₹5,000
• June - ₹6,000

Calculation of QAB:

(₹4,000 + ₹5,000 + ₹6,000) ÷ 3

QAB = ₹5,000

In case the QAB to be maintained is ₹5,000, the account meets the requirement.

What if the minimum balance is not kept?

In case the required balance is not maintained, the banks could:

• Charge non-maintenance fees
• Deduct relevant taxes
• Cut the account perks

The penalty amount varies from bank to bank.

Is It Necessary to Maintain a Minimum Balance for all Banks?

No, there are some banks that provide the following:

• Zero Balance Savings Account
• Salary Accounts
• Basic Savings Bank Deposit Accounts (BSBDA)

These accounts do not require customers to maintain a minimum balance.

Conclusion

The minimum balance is normally calculated by the banks on the basis of either the Average Monthly Balance (AMB) or the Quarterly Average Balance (QAB). Knowing about such calculations is of utmost importance for customers.

Before opening the savings account, one must know about the minimum balance requirements of the bank.