It is common for banks to charge fees for a variety of reasons – and if you’re not careful, they can erode your interest earnings over time. This article explains why banks charge fees and how you can avoid charges on your bank account.
Why do banks charge fees?
- Recovery of service costs
The primary reason for charging fees is to recover the costs incurred in providing certain services. A bank, for instance, uses its staff and resources when it provides you with services such as verifying your signature and your bank details or issuing you a chequebook or passbook. Bank fees help recover these costs.
The same applies when your bank charges you for using services such as issuing a bank draft or pay order or an interest/balance certificate. Since is difficult to calculate the exact costs incurred for each instance, bank charges are generally set arbitrarily.
- To discourage customers from resorting to unethical practices
In the case of overdraft and cash credit accounts, the bank assigns a limit to how much you can overdraw from your account. A bank generally honours cheques, DDs etc., issued over the pre-defined limit, but levies a surcharge and penal interest over and above what it normally charges for overdrafts and cash credit accounts.
In a similar vein, some banks honour transactions above the credit limit, but charge fees and penalties for doing so. The primary purpose of charging an extra fee/penalty is to discourage customers from resorting to such practices.
- To encourage customers to use their bank accounts responsibly
Banks offer various types of saving bank accounts depending on the minimum average balance (MAB) required.
For example, a person with limited means may be offered a no-frills account with a very low MAB limit. In contrast, customers who wish to use higher-end services may be required to maintain a higher MAB in their savings bank account.
If you have opted for a specific bank account category, you will need to pay the associated bank charges for non-maintenance of the required average balance. Sometimes, bank fees are charged to ensure the customer follows the prescribed conditions. For example, you may incur certain bank charges for issuing cheques without an adequate account balance.
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Choosing a bank account that does not charge fees for the services you frequently utilize is a good idea if you want to get #MoreFromYourBank. Understanding bank charges is crucial because it serves as a basis for calculating your monthly savings, the minimum balance to maintain, and any extra bank charges on transactions above a certain threshold.
In addition to higher interest rates and monthly interest credits, IDFC FIRST Bank offers Zero-Fee Banking* on 28 commonly-used banking services. This makes it ideal for those who want to maximize the potential of their savings account.
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*Disclaimer: IDFC FIRST Bank offers Zero Fee Banking on Rs 10,000 Average Monthly Balance (AMB) Savings Account and higher account variants, subject to maintenance of AMB in the account. These services are being offered free in good faith, and in case of abuse, the bank reserves the right to charge fees as per market norms. All rights reserved.
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