GS3 – Economy
Context:
The Department of Financial Services (DFS) has urged Public Sector Banks (PSBs) to reassess the penalties imposed for not maintaining the Minimum Average Balance (MAB) in savings accounts.
What is Minimum Average Balance?
- Definition: It refers to the average of daily closing balances in a savings account over a month.
- Purpose: MAB encourages account holders to maintain consistent balances, which helps banks improve their Current Account-Savings Account (CASA) ratio.
- CASA Ratio: Indicates the share of a bank’s low-cost deposits (current and savings accounts) in total deposits. A higher CASA ratio reduces the bank’s overall cost of funds, thereby increasing lending margins.
Penalty Mechanism:
- Imposition: Banks charge a fee if the MAB requirement is not met.
- Revenue Impact: Public sector banks earned around ₹9,000 crore from these penalties over the past five years.
- Determination: Each bank sets its own MAB thresholds and penalty structures, in accordance with Reserve Bank of India (RBI) guidelines.
- Penalty Structure: Can be either a fixed amount or a percentage of the shortfall from the required MAB, varying by account type and bank.
Concerns:
- Such penalties often affect low-income customers more severely.
- This may lead them to avoid formal banking systems, opting instead for fixed deposits or informal cash holdings.