How is Monthly/Quarterly Average Balance Calculated
I am sure most of us have a zero-balance corporate salary account. But what about your parents/spouse/child who has a normal savings account where in they need to maintain a minimum balance. If not a “minimum balance Penalty” will be levied. These penalty charges vary across the banks and some private bank charges exorbitant penalty. Sure, everyone would have experience paying a penalty at-least once in our lifetime.
Most of the banks uses Monthly Average Balance and Quarterly Average Balance. But do we really understand how it is calculated?
People often think that they need to maintain the minimum balance for the entire tenure, say monthly/quarterly. This is where most of us get it wrong and park our money in the bank just for meeting the minimum balance criteria. In reality as the name suggests it’s just the “average” monthly/quarterly balance.
Illustration 1 – Monthly Average Balance
Mr X has a account with some private bank which imposes a rule to maintain a Monthly Average balance of 5K. So what does that mean to X?
Is he supposed to maintain 5K anytime during the month, not exactly…. the banks just consider the average of the 30 days to be >=5K.
X can keep zero rupees in his account for the first 15 days and 10K in his account untouched for the next 15 days.
(0 rupees * 15 days) + (10K * 15 days) = 1.5 Laces/30 days = 5000 INR.
Illustration 2 – Quarterly Average Balance
If Mr. X has a account which requires him to maintain a Quarterly average balance of 25000 then
(0 rupees for the first 89 days of the quarter) + (25 laces for the last 1 day) = 25 Laces/90 days = 27777 INR.
If we understand this simple thing then we will not be locking our money in banks for the sake of minimum balance. Also this helps us to have more liquidity.
The above works only if there is a word “Average” – Contact your bank to know what is the method followed to calculate the minimum balance? In the absence of “Average” I assume its straight-forward; keep amount of X for the whole month/Quarterly.
Most of the private banks refund the minimum balance penalty once if you make a call to their customer care/walk in to a branch you could convince them stating the ignorance. I did this recently (2 weeks back) to my spouse’s account and the penalty is reversed within 2 days.