How banks are making money by penalising you

NEW DELHI: Are banks trying to compensate for bad loans by charging steep penalties from customers for not maintaining minimum account balance? In 2017-18, as many as 21 public sector banks and three major private sector lenders collected a whopping Rs 5,000 crore from customers for non-maintenance of minimum balance in their accounts. One reason for this, according to a TOI report, is that public sector banks are trying to increase fee collection to make up for losses from bad debts. Public-sector banks collectively lost Rs 85,361 crore from non-performing assets in 2017-18. Although almost half the banks reduced their fines, the increase by other banks has more than made up the reductions. Last year, a study by IIT-Mumbai professor Ashish Das showed that public sector as well as private banks had been imposing unreasonable charges on customers for failing to maintain minimum balances in their savings accounts. Some banks, the study claimed, had been imposing penal charges of over 100 per cent per annum on shortfall in maintenance of minimum balance in customers' accounts. Maintaining minimum average balance (MAB) in a savings account is important yet neglected by many. You must maintain the minimum balance in your account to avoid penalties. How MAB is calculatedMAB is the average of all the closing-day balances in a given month. To calculate the MAB, you need to add each day's end-of-the-day balance and divide it by the number of days in that month. MAB = (Sum of all the EOD closing balances)/ (number of days in a month)IllustrationAssuming, a bank asks that you maintain Rs 5,000 as average monthly balance: On July 1, the balance in the account is Rs 5,000. On July 12, withdrawal of Rs 4,000 takes place. EOD balance is Rs 1,000.On July 18, deposit of Rs 10,000 takes place. EOD balance is Rs 11,000.Summing up the EOD balances: For 11 days-from July 1 to July 12-sum of EOD balance will be Rs (5000*11) = Rs 55,000From July 12 to July 18, sum of EOD balances will be Rs (1000*6) = Rs 6,000 From July 18 to July 31, sum of EOD balances will be Rs (11000*13) = Rs 1,43,000. Sum of all the EOD closing balances = Rs 2,04,000Total number of days in July = 31So, the minimum average balance will be 204000/31 i.e. Rs 6,580.64How much is the penalty?The MAB requirement varies from bank to bank and branch to branch. For metro/urban branches, the requirement is usually higher than semi-urban/rural branches. Here's how four prominent banks levy penalty on non-maintenance of MAB: State Bank of IndiaApril 1, 2018 onward, SBI has lowered charges for non-maintenance of average monthly balance in savings accounts. 65291419 HDFC BankMinimum Balance - Average Monthly Balance (AMB) RequirementRs 10,000 (Metro / Urban branches)Rs 5, 000 (Semi-Urban / Rural branches)Charges applicable on Non-Maintenance of AMB for NRE/NRO Savings Account (Average Monthly Balance) AMB Slab Metro/Urban Semi Urban/Rural >=7,500 to < 10,000 Rs. 150 NA >=5,000 to < 7,500 Rs. 300 NA >=2,500 to < 5,000 Rs. 450 Rs. 150 0 to < 2,500 Rs. 600 Rs. 300 ICICI Bank Eligibility Resident Indian, >18yrs Minimum monthly average balance (MAB)* Metro and Urban locations - Rs.10,000 Semi-urban locations - Rs.5,000 Rural locations - Rs.2,000 Gramin locations - Rs.1,000 Charges for non maintenance of minimum monthly average balance Metro/Urban/Semi-Urban/Rural locations : Rs. 100 + 5% of the shortfall in required MAB Gramin locations : 5% of the shortfall in required MAB Punjab National BankMinimum quarterly average balance (QAB) & charges for not maintaining QAB Area Of Branch Minimum Qly. Average Balance Rural Rs.1000 Semi- Urban Rs.2000 Urban Rs.2000 RBI guidelines for levying penalty on non-maintenance of minimum balanceIn the event of a default in maintenance of minimum balance/average minimum balance as agreed to between the bank and customer, the bank should notify the customer clearly by SMS/ email/ letter etc. that in the event of the minimum balance not being restored in the account within a month from the date of notice, penal charges will be applicable.In case the minimum balance is not restored within a reasonable period, which shall not be less than one month from the date of notice of shortfall, penal charges may be recovered under intimation to the account holder.The policy on penal charges to be so levied may be decided with the approval of Board of the bank.The penal charges should be directly proportionate to the extent of shortfall observed. In other words, the charges should be a fixed percentage levied on the amount of difference between the actual balance maintained and the minimum balance as agreed upon at the time of opening of account. A suitable slab structure for recovery of charges may be finalized.It should be ensured that such penal charges are reasonable and not out of line with the average cost of providing the services.It should be ensured that the balance in the savings account does not turn into negative balance solely on account of levy of charges for non-maintenance of minimum balance.

from The Economic Times https://ift.tt/2ONqnYM