Are Penalties for Not Maintaining Minimum Balance Unfair? PSBs Levy Rs 8,495 Crore in Five Years

In a recent disclosure, the Ministry of Finance reported that 11 public sector banks(PSBs) collectively charged Rs 2,331 crore as penalties for non-maintenance of minimum balances in FY2024. This figure represents a significant increase from Rs 1,855.43 crore charged in FY2023. Over the last five years, PSBs have accumulated a total of Rs 8,495 crore from these charges.

Breakdown of Penalties by Banks

The penalties levied by the banks for failing to maintain monthly and quarterly average balances were detailed as follows: 

Ministry's Response and RBI Guidelines

Answering a parliamentary query, Minister of State for Finance Pankaj Chaudhary explained that the Reserve Bank of India (RBI) permits banks to impose penal charges for non-maintenance of minimum balance as per their board-approved policies. These charges must be a fixed percentage based on the difference between the actual balance and the required minimum balance. He also clarified that these penalties do not apply to basic savings bank deposit accounts, such as Jan Dhan accounts.

In response to the government’s revelation, Leader of Opposition Rahul Gandhi condemned the government for penalty collection in public sector banks (PSBs) from accounts that do not maintain an average balance. "The ‘penalty system’ is the door of Modi’s Chakravyuh through which an attempt is being made to break the back of the common Indian," Gandhi stated. He compared the government's penalty system to the complex, entrapping military formation from the Mahabharata epic, suggesting that it is designed to financially burden the common Indian.

The State Bank of India (SBI), the largest PSB in the country, does not levy penalties for non-maintenance of minimum balance. SBI discontinued this practice after FY2020, following an RTI query that revealed a significant portion of the bank's profits at the time were derived from these penalties.

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All the major trade unions in the banking sector including the All India Bank Employees Association(AIBEA) and the Bank Employees Federation of India(BEFI) criticised the penalties.  

Trend of Increasing Penalties

The data indicates a consistent rise in penalties collected by PSBs for non-maintenance of minimum balance over the past five years, increasing from Rs 1,738 crore in FY2020 to Rs 2,331 crore in FY2024. 

Speaking to Kanal, S S Anil, All India President of BEFI, also criticised the penalty system. He pointed out that rising non-performing assets (NPAs) and loan waivers typically benefit corporates, while the financial burden is shifted to common people. "To compensate for this loss, PSBs are punishing the common people or the poor customers who fail to maintain the minimum balance. Through the penalty for not maintaining minimum balance and other service charges, the PSBs are collecting a sizable share of their income. Recovering the corporate bad debts itself would ensure such unfair practices are avoided," Anil said.

The significant increase in penalties for non-maintenance of minimum balance raises questions about the balance between financial sustainability and the original purpose of these institutions.