What is the difference between a minimum balance and an average balance in a bank account?

Minimum balance and average balance are terms related to the requirements set by banks for maintaining a certain amount of money in your account. However, they are distinct concepts with different implications:

1. Minimum Balance:
Definition: A minimum balance is the lowest amount of money you must keep in your bank account at all times to avoid fees or account closure. Banks typically specify this amount in their account terms and conditions.
Purpose: The minimum balance requirement is set by the bank to ensure that customers maintain a basic level of funds in their accounts, which benefits the bank by providing a stable source of deposits.
Consequences: If your account falls below the specified minimum balance, the bank may charge you a maintenance fee. The fee amount and specific terms can vary from one bank to another and even between different types of accounts within the same bank.

2. Average Balance:
Definition: An average balance, also known as an average daily balance, is the average amount of money in your account over a defined period, usually a month. It is calculated by summing the daily balances in the account and dividing by the number of days in the period.
Purpose: Banks may use the average balance to determine whether you meet the criteria for certain account features, such as earning interest or avoiding fees.
Consequences: If your average balance over the specified period falls below a certain threshold, you may not qualify for certain benefits associated with the account. For example, to earn interest on a savings account, you might need to maintain a minimum average balance.

Here's a practical example to illustrate the difference:

Minimum Balance: Let's say your bank specifies a minimum balance requirement of INR500 for your savings account. If the balance ever drops below INR500 during the month, you'll be charged a maintenance fee.

Average Balance: For a different account, your bank might require you to maintain an average daily balance of INR1,000 to earn interest. To meet this requirement, you would need to ensure that the sum of your daily balances for the entire month equals or exceeds INR1,000.

In summary, while both minimum balance and average balance requirements are related to maintaining a certain amount of money in your account, the key difference lies in the way they are calculated and the consequences for not meeting the specified thresholds. Minimum balance requirements focus on a specific balance that must always be maintained, while average balance requirements consider the average amount of money in your account over a defined period. Violating these requirements may result in fees or the loss of certain account benefits.