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MAB or monthly average balance, as the name suggests, is the minimum amount your account must have on average at any point in the month.
Unless you have a zero-balance current account or savings account, you must maintain the minimum average balance stipulated by your bank in your account each month.
People often misunderstand the monthly average balance as the bank’s way of controlling the amount of money you spend – and using it as a mode of levying penalties if you fail to comply. This is, however, far from the truth.
Let us delve into this in detail to help you understand this concept better.
What is Monthly Average Balance or Minimum Average Balance (MAB)?
The monthly average balance is the minimum amount of money that the account holder has to maintain in their current account or savings account. This is the least bank balance that you, as an account holder, need to have in your account each month to avoid being penalised by the bank.
Some banks offer zero-balance current and savings accounts. Irrespective of the amount of money you have in such accounts, the bank will not levy penalties on you since there is no minimum balance requirement in the first place. That said, these accounts have their shortcomings and often have minimal features that aren’t enough for growing businesses.
A common misconception is that MAB is the minimum threshold the account balance can ever touch. For example, if the MAB is Rs 5,000, most account holders understand that Rs 5,000 must always remain in their account at all times. This, however, is not how it works.
In the example above, you can either choose to keep Rs 5,000 as an everyday balance or Rs 1.5 lakh (Rs 5,000 x 30 no. of days) on just one day in the month. Ultimately, the average for the month needs to total Rs 5,000.
How is MAB calculated?
Banks use a very simple formula to calculate the accountholder’s MAB:
MAB = (The total of end-of-the-day closing balances) / (number of days in the month)
Hence, the monthly average balance will be calculated using two figures:
- Calculating the total sum of closing balances in the month
- Number of days in the month
The average monthly balance is then calculated by dividing the total closing balances by the number of days in a month.
Let’s look at an example to understand this.
Rahul opened a current account in a bank. The bank required him to maintain a monthly average balance of Rs 10,000.
Let’s assume Rahul’s account had Rs 25,000 on June 1.
On June 5, he withdrew Rs 10,000, and on June 10, another Rs 10,000 was debited from his account to meet some business expenses.
On June 15, Rs 5,000 was credited to his account. On June 29, another Rs 5,000 was credited to Rahul’s account.
Therefore, Rahul’s monthly average balance will be:
|Days||Total days (A)||Amount in the account at end of the day (B)||A x B|
|First 4 days||4||Rs 25,000||1,00,000|
|5th to 9th day||5||Rs 15,000||75,000|
|10th to 14th day||5||Rs 5,000||25,000|
|15th to 28th day||14||Rs 10,000||1,40,000|
|29th to 30th day||2||Rs 20,000||40,000|
Using the formula, monthly average balance comes out to be:
= (1,00,000 + 75000 + 25000 + 1,40,000 + 40,000) / 30
= 3,80,000 / 30
= Rs 12,666.66
Hence, Rahul’s monthly average balance is much above the mandated Rs 10,000 and he will not be charged any penalty.
Why do banks enforce minimum balance requirements?
Average monthly balance is a critical way for banks to assess the account holder’s income stability. Lapses in the maintenance of the average monthly balance can be an indicator of the account holder having an irregular income source or a turbulent spending pattern. This then affects the credit score that goes on to affect the prospects should the customer require loans.
Banks also use the cash deposited by account holders for different purposes. By urging account holders to maintain a minimum balance in their accounts, the bank ensures that a substantial volume of cash is always available at the bank for deployment in various investment avenues.
Tips on maintaining monthly average balance
While the entire concept of average balance is rather simple, here are some ways in which you can optimise your monthly average balance maintenance and ensure a smooth ride with your bank.
- Weigh your options before you apply for a current or savings account. Compare the features of zero balance accounts with those of accounts that have a minimum average balance requirement. Figure out if the extra features of the latter are worth the balance that you need to maintain.
- Avoid multiple bank accounts. This can make it hard for you to track the MAB requirement norms of each bank and comply with them each month. It can be exhausting hauling funds from one account to the other to maintain MAB.
- Use a corporate credit card for your business expenses wherever possible. This way, you will not have to deal with the hassle of money going out of your bank account every now and then – it will only go out in the form of repayment of credit card dues at the end of your billing cycle. Similarly, if you are an individual with a savings account, try this approach with your personal credit card.
Penalty for non-maintenance
Since the monthly average balance requirement differs from bank to bank, the penalty charges are also different for each bank. The fact that you live in a metro or a semi-urban city also affects MAB and penalty charges. There is no upper limit to the penalty and banks have sometimes charged a 100% penalty in some cases.
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What is monthly average balance?
Monthly Average Balance is the minimum amount of funds that account holders must maintain to avoid being penalized by the bank.
Do I need to maintain the MAB every day in a month?
No. Since the daily closing balance is averaged out, the account holder may have more funds than MAB on some days that can make up for the shortfall on some days.
Where can I check the monthly average balance requirement for my account?
Account holders can opt for mobile banking, internet banking, or call the customer care center of their bank to know about the MAB requirement.
How is monthly average balance calculated by my bank?
Banks use the formula: MAB = (total of end of the day closing balances) / (number of days in one month) to calculate the MAB of an account holder.