UPDATE

# Quarterly Average Balance (QAB) vs Monthly Average Balance (MAB)

## Balance computation for Savings Account and Current Account

Savings and current accountholders are typically required to maintain a minimum balance in their bank account. Amount of balance requirement varies from bank to bank, and even the same bank could have differing balance requirement depending on the account holder’s location (Urban, Semi-urban and Rural) or category of account (Normal, Privilege, Platinum, etc).

It is important to note that minimum balance is not required to be maintained on each day, but only on an average. Let’s understand how bank calculates balance maintained by an account holder.

Quarterly Average Balance (QAB)

What is the meaning of QAB of Rs 10,000? It means that on an average the accountholder needs to maintain Rs 10,000 daily. Key word is average. Requirement is not to maintain Rs 10,000 balance every single day, but on an average. Under QAB the bank computes the average balance on a quarterly basis, i.e. once every 3 month. For example, for October to December quarter, day end balance for each day in the quarter would be summed up and divided by the number of days in the quarter to arrive at the QAB maintained. Let’s understand with a sample bank statement below:

DateParticularWithdrawalDepositBalance (A)Days (B)Product (A*B)
QAB = D/C10,250
01-Oct-12Opening Balance8,00014112,000
15-Oct-12Cash Deposit10,00018,00023414,000
07-Nov-12ATM Withdrawal15,0003,0002781,000
04-Dec-12Cheque Deposit9,00012,00028336,000
31-Dec-12Closing Balance12,000
SUM92943,000
(C)(D)
Balance maintained is as under:
• Opening balance on quarter beginning, i.e. 1st October is Rs 8,000
• Rs 8,000 is maintained for 14 days from 1st October to 14th October. Thus total balance maintained for 14 days is (8,000 * 14) = 112,000
• Rs 18,000 is maintained for 23 days from 15th October to 6th November. Thus total balance maintained for 23 days is (18,000 * 23) = 414,000
• Rs 3,000 is maintained for 27 days from 7th November to 3rd December. Thus total balance maintained for 27 days is (3,000 * 27) = 81,000
• Rs 12,000 is maintained for 28 days from 4th December to 31st December. Thus total balance maintained for 28 days is (12,000 * 28) = 336,000
• Closing balance on quarter end, i.e. 31st December is Rs 12,000
• Total balance maintained for 92 days in the quarter is 943,000. Thus on an average daily balance maintained is 943,000 / 92 = 10,250.
• Note that even though balance maintained was below 10,000 for (14+27) = 41 days, still QAB requirement of Rs 10,000 is met.

Monthly Average Balance (MAB)

MAB is similar in concept as QAB. Only difference is that while for QAB balance maintained is computed for 3 months (i.e. a quarter) at a time, for MAB computation is done every month. Thus the bank will add day end balances for each day of the month and divide by number of days in the month to arrive at MAB.

QAB vs MAB – Which is better?

Well depends from whose perspective the question is answered – customers or bank.

While optically QAB and MAB requirement of Rs 10,000 might look the same, but the chances of charges for non-maintenance on minimum balance is higher under MAB. Let me explain by way of an example:

You had Rs 5,000 in account for first 85 days of a quarter. On the 86th day you deposited Rs 100,000 and maintained the same for balance 5 days in the quarter (assuming 90 days in the quarter). While under QAB method balance maintained is [(85*5,000)+(5*100,000)]/90 = 925,000/90 = 10,278. Thus QAB requirement is met and no penalty would be imposed for non-maintenance of QAB.

However under MAB balance maintained would be Rs 5000 for 1st and 2ndmonths and [(25*5,000)+(5*100,000)]/30 = 625,000/30 = 20,833 for the 3rdmonth. Thus the bank will charge for non-maintenance on minimum balance for the 1st and 2nd month. Assuming charges of Rs 250 per month, total charges works out to Rs 500 under MAB, while NIL in QAB.

While the change from QAB to MAB is definitely negative for retail customers, it makes immense business sense for the banks. Not only does it increase the Fees income for the bank in the form of MAB charges, in my opinion deployable CASA (Current Account Savings Account) balances would also increase. Given low cost nature of CASA balances, this is expected to enhance bank’s Net Interest margins.

In simple terms, when the account balance calculation is done on a monthly basis, probability of customers maintaining a certain minimum balance more consistently is higher. On the contrary when the calculation is on quarterly basis, even if the customer maintains balance of Rs 900,000 just for 1 day (assuming 90 days in the quarter), theoretically Nil balance can be maintained for rest of 89 days and still meet the minimum balance requirement. Banks gain when accountholders maintain balances on more consistent basis as opposed to when the balance fluctuates widely. Balances maintained on consistent basis enables banks to deploy the same for longer at higher margins. On the contrary when balance fluctuates widely, banks would deploy the same for shorter tenor where margins would be lower.

Should RBI mandate banks to stick to QAB?

Some of the private sector banks has switched from QAB to MAB. Clearly the move is not customer friendly and would impact the small savings accountholders the most. While the banks are well within their rights to tweak the balance requirement, however given the likely adverse impact on small savings account holders due to steep charges for non-maintenance of MAB (which varies from Rs 250 to Rs 350 per month), RBI should mandate the banks to stick to QAB methodology in consumer interest. Banks might argue balance requirement is not changed and it’s only change in methodology, however clearly it is much more convenient for savings accountholders to adhere to balance requirement once every quarter rather than every month. Hopefully RBI will step in and mandate the banks to stick to QAB for minimum balance requirement.