PSBs Drop Minimum Balance Penalty to Win Back Savers: A Strategic Shift towards Customer Centricity
In a significant move, public sector banks (PSBs) in India have decided to drop the minimum balance penalty for their customers. This decision is expected to improve financial inclusion, address customer grievances, and boost savings deposits amid decadal-low interest rates and stiff competition from private-sector banks.
The move, which follows a regulatory push to address customer grievances and internal surveys that estimated limited revenue loss if such minimum balances are not maintained, is seen as a strategic shift towards customer centricity by PSBs.
According to RBI guidelines, PSBs are required to maintain a minimum average balance (MAB) in savings accounts. However, the banks have decided to waive off the penalty for not maintaining the MAB, which was earlier charged to customers who failed to meet the minimum balance requirement.
The decision is expected to benefit customers who maintain lower balances in their savings accounts. It will also help PSBs to attract a steady stream of depositors and add to their savings deposit base.
However, the move may not be enough to stem the decline in deposit market share of PSBs, which has been steadily losing ground to private-sector banks. According to RBI data, the share of deposits in PSBs dropped by 580 basis points to 55.8% between end-March 2020 and 2025, while private-sector banks saw a 570 basis point rise to 35.2% over the same period.
To offset the revenue loss, PSBs are expected to accelerate digital monetization, focus on fee-based income, and deploy analytics-led cross-selling.
In an interview, Karan Gupta, director and head of financial institutions at credit rating agency India Ratings & Research, said, "For the customer, banks have now reduced the savings rate to 2.5%, which used to be 3.5-4% not very long ago. So, the customer was earning something at least on savings deposits, but now they have little incentive to keep money in that account."
Deep Narayan Mukherjee, partner and associate director-data science at consulting firm Boston Consulting Group, added, "Savings interest rates are much below the inflation rate. If savers consider the true opportunity cost, they may prefer to invest in liquid mutual funds and make higher returns, but they would lose some liquidity."
According to parliamentary reply dated 24 July 2024 from Union minister of state for finance Pankaj Chaudhary, PSBs earned ₹2,331 crore from these penalties in 2023-24, which comes to 0.3% of their FY24 revenue.
In conclusion, the decision by PSBs to drop the minimum balance penalty is a strategic shift towards customer centricity, aimed at improving financial inclusion and boosting savings deposits. While it may not be enough to stem the decline in deposit market share of PSBs, it is a step in the right direction towards attracting and retaining customers.
