Fault Lines in Implementation of Minimum Balance Rule for Savings Bank Accounts in India

Abstract

The objective of this note is to highlight the true features of a significant regulation put in place by RBI on levy of penal charges for non-maintenance of minimum balance in savings bank accounts. Banks have been given freedom to prescribe their minimum balance requirements in normal savings bank accounts. However, there are certain far reaching guidelines that banks need to follow when it comes to levy of charges for non-maintenance of the same. While arriving at the charges for non-maintenance of minimum balance, banks are required to ensure that (i) the penal charges are a fixed percentage levied on the shortfall, i.e., the amount of difference between the actual balance maintained and the minimum balance prescribed by bank, and (ii) the penal charges are reasonable and not out of line with the average cost of providing the services.

While giving some freedom to banks on the quantum of charges, the spirit and suitability of the regulation hinges on RBI’s fundamental policy, wherein it tried to judiciously link methods like (a) banks paying interest, in percentage terms, on the amount held under deposits, (b) banks charging interest, in percentage terms, on loan balances in accounts, and (c) savings deposit account holders paying a penal fee for non-maintenance of minimum balance, in percentage terms, on the shortfall amount.

This note shows that banks have set their penal charges in violation to the spirit behind the regulation by not framing the charges as a fixed percentage of shortfalls. It is observed that most of the banks have set some slab structure in a manner that vitiates the fundamental principle of charges being a fixed percentage of the shortfall. Furthermore, for most of the banks, the charges when considered as a percentage of shortfalls work out to an average rate of 6.5% of every month's shortfall, which is equivalent to a penal rate of 78% per annum. This high rate of penalty appears to have no correlation with the costs for arranging such funds at, say, the call money market rate. The present charges for the cost of shortfall funds are camouflaged in a manner which doesn’t look exploitative but are actually so. RBI may like to see if it is fair for the banks to let their charges remain as is, disregarding the underlying and intended spirit of the regulation.

This report has been prepared to facilitate the regulator and the banks to come out with meaningful supervisory steps and corrections, while taking forward normal savings bank accounts in the right perspective and thus supporting the country’s financial inclusion drive.