FINANCE TIP OF THE DAY
Can you afford your loan?!
Know the quantity of loan you can afford. The banks may sanction loan based on your income but you should look at your monthly expenditure and see if you can afford the maximum that banks offer. As a thumb rule, remember not to let your credit exceed 40% of your income!
Increase in minimum balance! How do you cope?
Each type of account requires a minimum balance to be held in that account in order to avail the services offered on the account. The minimum balance required varies as per the account and services being offered. However at times the banks may change their rules and raise the minimum amount required to be held in the account. Such a move by the bank may imply trouble for the customer who will now have to arrange for the extra funds. This could come as a painful surprise in difficult financial times. Additionally it also implies that a larger corpus will have to be locked in a low interest bank account. The situation is unavoidable in case the bank policies change. Understanding the intricacies of the minimum balance policy will help you cope with such a situation and manage your funds more efficiently.
The Rationale of Changing Minimum Balance
In October 2011 the Reserve bank of India deregulated the interest rates on bank accounts and has thereafter not specified any minimum balance to be maintained in savings or salary accounts in banks. However it does mandate a one month notice period to customer in case of any changes in the minimum balance or interest rates. The private sector banks have used this deregulation to their advantage and increased the minimum balance amount so as to generate additional floating funds as the customers will deposit more money to avoid penalties. It is interesting to note that the major public sector bank, SBI has rolled back its minimum balance requirements and has zero balance facilities available for its customers.
The Average Balance Quarterly
Earlier there was the requirement to maintain the minimum specified balance in your account at all times. However there has been a trend for quite a while now to ask for a quarterly balance. There are many doubts in the minds of the customers regarding the exact implications of this term. The quarterly average minimum balance means that instead of having to maintain that amount always one can vary the amount of money held as long as the average for the quarter works out to be the minimum required balance. In case one hold a higher amount for a short duration then the minimum balance in the account can dip below the prescribed for longer period so that the overall average for the quarter is above the minimum required. The bank will levy additional charges only if the average minimum balance over the quarter dips below the required.
The Average Balance Monthly
Recently some of the leading private sector banks such as ICICI, HDFC, Axis and Yes Bank have introduced new norms regarding the minimum balance in accounts on a monthly basis. This simply implies that instead of maintaining an average balance over a quarter, the customers now have to keep the monthly average also above the minimum stipulated. Most of the banks have fixed this monthly balance at around Rs. 10,000/- in urban areas, Rs. 5000/- in semi urban areas and Rs. 2500/- to Rs. 2000/- in rural areas.
When the customer is unable to maintain the minimum stipulated then the banks charge a pre determined additional amount as account maintenance charge which is deducted from their balance in the account. This penalty has also been increased recently along with raising the minimum monthly balance. The penalty varies from Rs. 350/- to Rs. 250/- for HDFC and ICICI banks to Rs. 750/- (Metro & Urban) and Rs. 500/- (Rural) for Axis bank.
How to Deal with the Situation
When such a situation arises it requires the customer to deposit additional amount if the amount in the account is below the minimum required. There are a few ways to cope with such a demand without actually having to borrow money to maintain the minimum balance. For people who normally maintain a higher balance this may not be a crisis but for those who have to use the money from the account for day to day needs there has to be a planned move in order to avoid penalties being levied by the bank. Discussed here are a few practical steps that can be used to cope with such a situation.
- The first step is to ascertain that any such change by the bank is applicable to your existing account or is it meant for the new accounts being opened hereafter. In many cases the banks keep the minimum balance figure unchanged for existing customers.
- If the balance requirement has actually been changed then one needs to calculate as to how a lower figure can be maintained without facing additional charges. This can be achieved by keeping a higher amount for a few days so that the average over the ninety day or thirty day period works out to at par or above the required balance.
- One can also check with the bank manager if any other kind of account that requires a lower minimum balance can be opened which shall still provide the bare minimum services. Shifting to zero balance account in such a situation is a smart move, even though it may not provide all the services.
- The exact amount that has to be held in the bank for a certain period in order to maintain the average quarterly or monthly balance will vary as per the individual customer and account type. But this figure needs to be carefully worked out in consultation with bank manager in order to get the maximum value of your hard earned money.
- One needs to ascertain the exact amount of additional penalty that will be levied for having a lower balance. This amount varies with banks, locations and type of account.
Banks have their own compulsions for which they have to change the minimum balance required in an account depending on the prevailing financial situation. Thus one needs to be educated and prepared for such a contingency in order to avoid additional charges while keeping funds free for other significant investments rather parking them idly in bank accounts.