The Reserve Bank of India (RBI) does not set guidelines for the minimum balance in savings accounts, leaving it to individual banks to determine these requirements based on their costs and service considerations. However, it advised that banks should not exploit customer difficulties or inattentiveness. According to data shared in Parliament PSBs in India collected over ₹15,000 crores in penalties for failing to maintain minimum balances between 2014-15 and 2023-24.
India has one of the largest populations without access to formal banking services in the world. The annual Financial Inclusion Index (FI- Index) by the Reserve Bank of India (RBI) for the period ending March 2024 was 64.2 as against 43.4 for the period ending March 2017, where 0 represents complete financial exclusion and 100 indicates full financial inclusion. As a result, the main priority had been on providing access to banking while encouraging account usage among the poor was not as much of a priority
Globally, initiatives to promote savings are recognized as key anti-poverty measures. One popular method is to improve access to basic formal savings accounts. When income is unpredictable, managing money becomes challenging, making it difficult to meet regular financial obligations. The cost of maintaining savings accounts in order to maintain the minimum balances required by commercial banks has become a major obstacle during periods of unpredictability.
In this story, we look at the penalties levied by the banks for not maintaining the prescribed minimum balances over the years and the potential impact of such penalties on financial inclusion.
What are minimum balance requirements? How are they calculated?
Most banks globally require customers to maintain a minimum balance in their accounts. Maintaining a minimum balance does not mean the money must remain in the account for the entire month. Instead, the minimum average balance is calculated by taking the average end-of-day balance over the month and dividing it by the total number of days in that month.
This minimum balance helps avoid penalties and allows customers to access benefits like better interest rates. This requirement helps banks cover operational costs and maintain sufficient deposits for lending and regulatory compliance. Banks offer various account types and facilities based on the average balance maintained by the account holder, with requirements set on a monthly, quarterly, or half-yearly basis, depending on the account type and location. Some banks calculate penalties based on how much the customer falls short of the minimum balance, with higher penalties for larger shortfalls. Public sector banks typically have lower minimum balance charges compared to private banks, and penalties for not maintaining the minimum balance can vary by region, account type, and the specific bank.
The Reserve Bank of India (RBI) does not set guidelines for the minimum balance in savings accounts, leaving it to individual banks to determine these requirements based on their costs and service considerations. However, it advised that banks should not exploit customer difficulties or inattentiveness. Instead of imposing penalties for not maintaining the minimum balance in regular savings accounts, banks should limit the services available to those provided for Basic Savings Bank Deposit Accounts and restore full services once the required balance is met. The RBI has issued the below guidelines for banks to follow when levying charges for non-maintenance of minimum balances.
More than fifteen thousand crores have been collected as penalties since 2014-15
As previously noted, each bank establishes its own penalty rules according to a board-approved policy. Banks set specific minimum balance requirements and penalties, with some charging penalties on a quarterly basis, while others do so monthly. According to data shared in Parliament by the Government, Public Sector Banks (PSBs) in India collected over ₹15,000 crores in penalties for failing to maintain minimum balances between 2014-15 and 2023-24. The year 2023-24 saw the second-highest penalty collection, amounting to ₹2,331 crores, following the ₹3,489 crores collected in 2017-18. Interestingly, in 2017-18, the State Bank of India (SBI) alone was responsible for 70% of the penalties collected. However, in 2023-24, despite SBI not collecting any penalties, other PSBs still collected ₹2,331 crores in penalties.
SBI tops in penalty collection, followed by Punjab National Bank
As of 2024, India has 12 Public Sector Banks (PSBs), reduced from 27 due to a series of strategic mergers aimed at consolidating and strengthening the banking sector. The first major merger occurred in 2017 when the State Bank of India (SBI) merged with its five associate banks—State Bank of Bikaner and Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala, and State Bank of Travancore—along with the Bharatiya Mahila Bank. In 2019, the Bank of Baroda absorbed Vijaya Bank and Dena Bank. The most extensive consolidation happened in 2020, with Punjab National Bank merging with Oriental Bank of Commerce and United Bank of India; Union Bank of India merging with Andhra Bank and Corporation Bank; Canara Bank merging with Syndicate Bank; and Indian Bank merging with Allahabad Bank. These mergers have streamlined the sector, resulting in fewer but larger and more robust PSBs.
Regarding the collection of penalties, SBI has collected the highest amount among PSBs, even though it only imposed penalties for three years starting in 2017. Initially, SBI charged a monthly average balance (MAB) requirement until 2012, then suspended these charges until 31 March 2016, while other banks, including private banks, continued to charge as per their board-approved policies. SBI reintroduced the MAB requirement on 1 April 2017 and collected approximately ₹3,533 crores in penalties between 2017-18 and 2019-20. Punjab National Bank ranked second, collecting ₹2,138 crores, followed by Indian Bank with ₹1,720 crores. SBI’s high collection may be attributed to the large number of accounts it holds.
Penalization as a way to cross-subsidise other operational costs?
The significant amounts collected as penalties for failing to maintain minimum balance possibly indicate that banks may be using this amount to cross-subsidize the other operational costs. Ideally, the penalty collected should only be limited to the cost of providing services even when the minimum balance is not maintained. Banks should not impose charges that cover other growing broader operational costs, such as digitization, employee attrition, ATM services etc, which are distributed across all savings account holders.
Given the autonomy granted to banks to determine penal charges, it is crucial for the RBI to ensure that banks do not artificially create cross-subsidization through excessive penalization. This oversight is essential to maintain fairness and prevent banks from imposing disproportionate charges that could unfairly burden certain customers while subsidizing others.
