Priority Banking: Hidden Cost & Charges with Examples: Finance Trading Times

Priority Banking: Hidden Cost & Charges with Examples

What is the cost and conditions for Priority Banking / Wealth Management Services ?
The cost and conditions vary from bank to bank.
Continuing further from last article Priority Banking / Wealth Management Services: High Hidden Cost, Less Practical Use,
Usually, there is no cost associated when signing up for priority banking services. The only requirement is to keep a minimum balance amount (usually a high amount) in your savings bank account.
Some banks may even automatically "upgrade" you to a Priority Banking / Wealth Management status if you keep sufficient cash in their accounts for some time.
The minimum amount of bank balance required varies and depends upon a few factors.
Say for e.g., if you are a salaried person and hold a salary account with the bank, the minimum required balance for priority banking can be 50,000.
But if you are a normal savings account holder, it may high upto 100,000 Rs.

If it is at no extra charge and I have that much balance in my bank account, what's the harm in taking Priority Banking / Wealth Management Services
That's the million dollar question - and the answer to understand.
Just imagine it from the bank's perspective - why is the bank offering you such high class priviledges for fee without any charges solely on the basis of amount of bank balance you maintain with them?
The reason is that the amount of money you keep in your savings account, that earns the tiny 4% interest only. But if you push that money to higher maturity Fixed deposits, the interest earned could be as high as 10% i.e. 2.5 time more the interest income. See the next section for calculations

Priority Banking / Wealth Management Services: Cost & Charges with Examples

What do I loose for this Priority Banking / Wealth Management Services ?
Simple - it's the interest income that you loose and that can be as high as 2.5 times.
Let's see some calculations here:

Example Calculations for Priority Banking / Wealth Management Services

Example 1) You have a zero balance salary account with a particular bank. You have been keeping say 50,000 Rs. in their account for last few months. They offer you priority banking at no charges, but with only condition that your zero balance account will now become a 50,000 balance account. You feel that you anyways have money lying in the bank account, so why not take up the free-of-charge priority banking services. But you loose something and here's how:
Assume you keep 55,000 in your zero balance salary account.

If you make a FD of say 50,000 (keeping 5,000 for incidental expenses), and that FD gives you 10% interest, then your interest incomes is:
50,000 * 10% = 5,000 Rs.
5000 * 4% = 200 Rs.
Total 5,200 Rs.

But if you sign up for the priority banking services, i.e. you need to keep 50,000 as balance in savings account itself. You dont make any Fixed Deposits, then you earn the standard 4% interest so your interest income in one year is 55,000 * 4% = 2200 Rs.

Compare the two figures - 5,200 to 2,200 - its 3,000 Rs. higher or 2.4 times higher. This is what you loose (or pay to the bank indirectly) for this so called "free of charge" priority banking service. It's not a small amount.

Example 2) You have a normal savings account and you keep 250,000 Rs. on an average. The bank offers your Priority Banking but asks you to keep 100,000 Rs. as minimum balance. You agree with that thinking that you are anyways keeping 2.5 lakhs, so nothing wrong in signing up for this free of charge priviledges service? Here are the calculations about your losses:
If you sign up, you need to keep 100,000 in savings account. So rest 1.5 Lakhs you put in FD giving you 10%.
First 1 Lakh gives you = 4% * 100,000 = 4,000 as interest income
Next 1.5 lakh gives your = 10% * 150,000 = 15,000 as interest income

Total interest income in case of priority banking = 19,000 Rs.

In case you dont sign up for priority banking and keep minimum required 10,000 as balance and savings account and move rest 2.4 Lakhs in Fixed deposits offering 10% interest, then interest income will be:
10,000 * 4% = 400 Rs.
240,000 * 10% = 24,000 Rs.
Total interest income = 24,400 Rs.

Compare this (24,400) with that available from priority banking (19,000), you are getting 5,400 Rs. less. That's a big amount.
And that is the hidden cost of your priority banking or wealth management service which appears to be offered "free of cost".

One question that will come is by locking in your money in FD or Fixed deposit, you may not have access to it when you need it. But many banks offer what is called the Flexi Deposits / Auto Sweep Fixed Deposits: A Good Banking Service which get encashed automatically without the need to break the FD manually. Your money is with you always, offering you best of both - high interest of FD and ease of liquidity of savings account.
Let's see the Priority Banking: The reality of services offered
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