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Understanding Your Monthly Average Balance

Adhil Shetty
Understanding Your Monthly Average Balance

Beginning this financial year, almost all public sector banks have introduced a monthly average balance structure for Savings Account holders. Here is all you need to know about monthly average balance and how banks calculate this balance.

So what exactly is monthly average balance?

Many savings account holders wrongly assume that Monthly Average Balance (MAB) means they must keep a stipulated amount of money parked in their account at all times. MAB is actually defined as the sum total of the amount of money at the end of each day of the month divided by number of days of the month. All working days and bank holidays are included in the number of days in the month.

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Monthly average balance calculation made easy

The amount of money in your bank account at the end of each day makes up for the day’s final balance, also known as the end of day (EOD) closing balance. The monthly average balance is derived by dividing the sum total of EODs for every day for the month by number of days in that month.

Illustration: Let us assume you have a balance of Rs. 15,000 on January 1 in your savings bank account. Assuming you withdrew Rs. 10,000 on January 5 but deposited Rs. 10,000 on January 20, here is how your MAB for the month will be calculated.

  • Jan 1 to Jan 4: EOD balance = Rs. 15,000*4 = Rs. 60, 000
  • Jan 5 to Jan 19: EOD balance = Rs. 5,000*15 = Rs. 75,000
  • Jan 20-Jan 31: EOD balance = Rs. 15,000*12 = Rs.  1,80,000
  • Total Balance = Rs. 60,000 + Rs. 75,000 + Rs. 1,80,000 = Rs. 315,000
  • Number of days in Jan (including bank holidays and working days) = 31

Final MAB = Rs. 3, 15,000/31 = Rs. 10,161.29

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Penalty for non-maintenance of MAB

The charges or penalty for non-maintenance of MAB varies from bank to bank. The State Bank of India, for example, has recently introduced minimum balance requirements for all bank account holders except basic savings bank and Pradhan Mantri Jhan Dhan Yojana (PMJDY) accounts. Account holders are now required to maintain an MAB of Rs. 5,000 if they live in metro cities and Rs. 3,000, Rs. 2,000 and Rs. 1,000 if they live in urban, semi-urban and rural areas.

The applicable penalty is also linked to how short the balance is from the MAB that’s required. For example, SBI will charge a penalty of Rs. 100 plus service tax for balance below 75% of the MAB, and Rs. 50 plus service tax for 50% or less. The penalty charges for rural areas will range between Rs. 20 to Rs. 50 plus service tax.

Monthly Average Balance vis-à-vis Quarterly Average Balance

Some banks have policies that seek account holders to maintain a Quarterly Average Balance or QAB instead of MAB. To calculate QAB, you must use the same method as above to calculate the total quarterly balance, and divide it by the number of days in the quarter.

Tips to maintain Monthly Average Balance

  • Know your minimum balance requirements:Be aware of what your bank needs you to maintain in the account. Also know if the requirement is on a monthly or quarterly basis.
  • Opt for PSU banks:Public sector banks charge a lower penalty for non-maintenance of MAB compared to private banks. Opting for a bank account in PSUs can be a good way to save on any unwanted high penalties. 
  • Know the date range period:Do not assume that calculations for MAB begin on the first of every month. Check with your bank as to what the period for MAB calculation will be.
  • Opt for alerts:Be aware of how much money you have in your account. Opt for SMS and email alerts to keep yourself updated of the MAB requirements.

Maintaining your monthly average balance should be a part of your financial planning. With some careful cash management, you can avoid MAB-related penalties.