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ICICI Bank's recent sharp hike in the minimum average balance (MAB) for new savings accounts drew heavy criticism, prompting the bank to reduce the requirement to ₹15,000 from ₹50,000 for urban and metro areas. For semi-urban branches, MAB is now ₹7,500, while rural customers will need to maintain a minimum of ₹2,500.

The episode, however, has reignited questions about the appropriateness of MAB. The origins of MAB are unclear. However, it appeared in Goiporia Committee on Customer Service in Banks (1990) recommendations. An RBI notification dated December 26, 2002, noted, inter alia, that '[it] has not issued any guidelines regarding the minimum balance to be maintained in savings bank accounts'. These facts suggest that MAB emerged in the 1990s, implying that it developed as a banking practice with regulatory acquiescence.

This seems plausible, as interest rate deregulation (phased-in since 1990) caused banks' spreads to shrink significantly during the 1990s. To buoy their bottom lines, banks sought to boost fee income, and MAB may have appeared as a solution. Once a few - likely private - banks adopted it, the practice quickly spread across the sector.

Banks capitalised on the financial illiteracy and acquiescence of account holders. Unlike borrowers, who have forums to voice grievances, these depositors were largely unorganised and voiceless. The situation remains little changed today.

SB deposits have continued to grow in both rate of growth and share of total deposits. In short, 'depositor discipline' in Indian banks remains immature - despite being a key part of market discipline (Pillar 3 of Basel III), which India has adopted.

RBI has largely taken a hands-off approach to MAB. In 2024, it issued flexible guidelines on charging for non-maintenance, without prescribing specific amounts, emphasising transparency in penalties instead.

But do banks have unfettered freedom to fix MAB?

Banks introduced MAB to offset rising operating - and especially technological - costs, indirectly challenging the theory of 'economies of scale'. Instead of imposing MAB, they could have invested in tech, accepting lower short-term profits and dividends for medium-term gains.

Staff expenses declined due to mechanisation. For example, during 2005-24, the average wage bills/total income ratio for domestic scheduled commercial banks (excluding regional rural banks) dropped from 15.14% to 13.75%.

Banks reap non-financial benefits of customer acquisition through the opening of SB accounts. They become privy to information at zero cost, enabling them to foray into cross-selling, for instance, with fee income potential.

Combined with low interest rates on SB accounts, MAB hits depositors with a double whammy:

• Acts as a TDS and dampens depositors' spending capacity, leading to lower demand for goods and services, which, in turn, constrains economic growth.
• Limits depositors' avenues for investments with possibly higher returns, including even their own bank's short-term deposits.
• Post-demonetisation, digital payments surged. If SB depositors aren't promptly informed about their MABs, auto-debits fail and cheques bounce - both triggering penalties.
• High MABs, combined with the need to maintain balances for digital bill payments, raise SB depositors' interest income, pushing some over the ₹10,000 I-T exemption and exposing them to tax.
• At the macro level, MAB hinders financial inclusion. The World Bank's Findex 2025 notes India has the most unbanked adults.

For banks, it's a different story:

• Increases deposits, enabling them to provide more short-term loans.
• Generates 'float' deployable in the overnight call market to earn interest, which can be higher than that offered to SB depositors. The difference acts as a 'hidden' fee for banks to maintain the accounts.
• High MAB, which a smaller number of people can afford, raises the 'concentration risk' in banks' deposit portfolios.
• Easy access to deposits via diktats like MAB creates moral hazard for bank employees, who may neglect traditional deposit mobilisation efforts.
• High MABs encourage depositors to 'hop' between banks, leaving old accounts open - driving the rise in inoperative accounts.

MAB is one form of 'premiumisation' of banking products and services. Such 'premiumisation' may be kept in abeyance until:

• India graduates into an upper-middle-class economy.
• Financial inclusion of adults becomes complete.
• Financial and digital literacy improves.
• Banks become responsible enough to adhere to market discipline principles and disclosure requirements as enshrined in Basel III.
• When implemented, it should have clear regulatory backing, prioritising depositors' interests as enshrined in the Banking Regulation Act 1949.