How government banks are easing burden on savings account holders
What's the story
In a major policy shift, all public sector banks (PSBs) in India may soon scrap penalties for not maintaining a minimum balance in savings accounts. As per the Times of India, the move comes after discussions with the Finance Ministry. To note, banks like Canara Bank, Punjab National Bank, Bank of Baroda, and Indian Bank have already scrapped this requirement.
Policy review
What prompted the change?
The Finance Ministry has questioned the need for banks to penalize customers for not maintaining a minimum balance. This comes amid concerns over the declining share of low-cost current and savings account deposits in total deposits. The Reserve Bank of India (RBI) also noted in its financial stability report that "banks' liability profile is changing, with the share of higher-cost term deposits growing compared to low-cost current account and savings account (Casa) deposits."
Data impact
Influence of SBI's experience
Bankers say Jan Dhan data shows that while many of these accounts were initially dormant, balances rose steadily. This experience appears to have influenced the policy shift. State Bank of India (SBI) was the first lender to remove minimum balance requirements in 2020 after public backlash, when an RTI disclosure revealed that charges collected for non-maintenance of balances had surpassed its net profit—largely absorbed by provisions for bad loans.
Banking norms
Difference in approach of PSBs and private banks
Traditionally, PSBs had lower balance requirements than private banks. The requirement was waived for Jan Dhan accounts. Private banks also waive the minimum balance requirements on salary accounts, and those where the customers maintain a threshold in terms of 'relationship value' including fixed deposits and other investments. Historically, banks have been using returns from low-interest savings accounts to cross-subsidize free banking services.
Cost recovery
Shift in PSB approach
With most banking services now provided digitally, incremental costs for banks have reduced. The new approach is to recover the costs of maintaining accounts via other means like debit card fees and charges for transactions beyond free limits.