Minimum Balance, Maximum Burden, Why Banks Must Rethink MAB Norms in India

Introduction

The recent decision by ICICI Bank to sharply raise the Minimum Average Balance (MAB) for savings accounts has reignited a nationwide debate on the fairness and logic behind such requirements. The bank hiked the MAB for urban and metro areas from ₹15,000 to ₹50,000, a more than threefold jump. For semi-urban branches, the MAB is now ₹7,500, while rural customers must maintain ₹2,500.

The backlash was swift. Critics pointed out that such steep hikes, especially during a period of sluggish economic recovery, burden ordinary depositors while disproportionately benefiting banks. The episode has resurfaced fundamental questions:

• Is MAB a justifiable banking practice in today’s India?

• Does it align with the goals of financial inclusion?

• Or has it become a tool of “premiumsation” where basic services are turned into privileges?

This article unpacks the origins, logic, criticisms, and broader socio-economic consequences of the MAB regime in India.

Origins of MAB in India

The concept of maintaining a minimum balance in savings accounts is not new. It can be traced back to the Goiporia Committee on Customer Service in Banks (1990). The Reserve Bank of India (RBI) notification dated December 26, 2002, reinforced the practice by stating that banks were required to maintain minimum balances in savings accounts.

But the real turning point came during the 1990s economic liberalisation, when interest rate deregulation squeezed banks’ spreads. As banks sought new income streams, non-interest income—fees and charges—gained prominence. MAB charges thus evolved into a convenient instrument for banks to stabilise revenues.

While initially appearing as a modest requirement, MAB gradually transformed into a significant source of bank income, especially as customers often fell short of the mandated balance, triggering penalty fees.

How Banks Justify MAB

From the perspective of banks, MAB is defended on multiple grounds:

1. Cost of Operations: Running and maintaining accounts involves costs—staff, digital infrastructure, security, and compliance. MAB supposedly ensures these costs are met.

2. Depositor Discipline: Banks argue that MAB instills “financial discipline” by encouraging customers to maintain savings instead of frequent withdrawals.

3. Liquidity Support: The balances maintained help banks manage liquidity, offering flexibility to deploy funds into lending or investments.

4. Risk Management: A higher MAB is seen as reducing “concentration risk” in deposit portfolios, as it weeds out dormant or low-value accounts.

Yet, while these justifications appear logical, critics argue that they mask deeper inequities in how the burden is distributed.

The Problem with High MAB

1. Disproportionate Impact on the Poor and Middle Class

A large segment of India’s savings account holders belongs to the lower- and middle-income classes. For them, maintaining balances of ₹50,000 or even ₹15,000 is impractical. Instead of enabling financial access, high MAB thresholds exclude the very groups banking reforms were meant to empower.

2. Hidden Costs and Penalties

When account holders fail to maintain MAB, they incur penalty charges. These penalties often outstrip the interest earned on savings accounts, effectively turning a “savings” account into a net loss.

For example, at an interest rate of 3-4% per annum, a depositor with ₹10,000 earns roughly ₹25-30 per month. However, non-maintenance penalties can run into hundreds of rupees, eroding savings.

3. Conflict with Financial Inclusion

The government’s flagship Jan Dhan Yojana and RBI’s financial inclusion drive have successfully brought millions of unbanked individuals into the formal banking system. However, high MAB policies risk alienating these very individuals by imposing elitist entry barriers.

In fact, the World Bank’s Financial Inclusion Index (2022) shows India making major progress in expanding banking access. But the persistence of MAB undermines these gains, as it discourages low-income families from using formal accounts.

4. Erosion of Trust

Savings accounts are meant to be the most basic, no-frills product, fostering trust between banks and citizens. When customers perceive banks as imposing arbitrary conditions, it damages trust and pushes them toward informal savings mechanisms, defeating the purpose of financial deepening.

Economic and Social Implications

1. Constraining Consumption

High MABs lock up household funds that could otherwise be used for daily expenses, healthcare, or small investments. This reduces aggregate demand and curtails economic activity at the grassroots level.

2. Exclusion from Higher Returns

Depositors who are compelled to maintain balances in savings accounts miss out on opportunities to invest in higher-yielding instruments such as mutual funds, recurring deposits, or government bonds.

3. Digital Divide

Post-demonetisation, digital payments and online transactions have surged. But small account holders often struggle with penalties due to automated debits and balance mismatches, discouraging them from embracing digital banking.

4. Reinforcing Inequality

By privileging those who can afford high balances, banks inadvertently deepen financial inequality. Urban elites benefit, while rural and semi-urban customers remain marginalised.

The Regulatory Dilemma

The RBI’s stance has been relatively hands-off. In 2024, it issued flexible guidelines that encouraged banks to focus on transparency in penalties rather than prescribing specific MAB amounts.

While this protects banks’ autonomy, it raises concerns: Should essential financial products like savings accounts be left entirely to market forces? Or should regulators intervene to safeguard consumer rights?

The Banking Regulation Act, 1949, gives RBI wide powers to ensure fair banking practices. However, in practice, the central bank has avoided prescribing hard caps, preferring a principles-based approach.

The Case Against MAB: A Broader Critique

1. Economies of Scale Ignored
   Banks justify MAB on cost grounds, but technological advances (automation, digitisation) have significantly reduced per-account costs. Between 2005-2014, the staff expenses-to-income ratio of commercial banks fell from 15.14% to 13.75%, undermining the cost argument.

2. Cross-Subsidisation Practices
   Banks deploy balances from savings accounts to support short-term investments and profit generation. High MAB essentially forces small depositors to subsidise bank profitability.

3. Moral Hazard in Mobilisation
   By relying on MAB for easy deposits, banks may neglect traditional mobilisation strategies like building customer relationships, innovating products, or expanding rural outreach.

4. Premiumsation of Basic Banking
   MAB turns banking into a tiered service model, where basic facilities are offered as “premium” privileges, eroding the universality of banking.

Global Comparisons

Globally, minimum balance requirements are less common in developed economies:

• United States: Many banks offer “no minimum balance” accounts, especially for basic savings.

• Europe: Regulatory emphasis is on customer rights, with several countries mandating zero-fee basic accounts.

• China: Focus remains on expanding account access rather than penalising depositors.

India’s persistence with MAB stands in contrast, raising questions about whether its model is out of step with global financial inclusion norms.

The Way Forward

To reconcile bank viability with depositor fairness, policymakers and regulators can consider:

1. Tiered Accounts: Different MAB thresholds for different income groups, with basic zero-balance accounts mandated for all.

2. Transparency in Charges: Banks should be required to prominently disclose all penalties, helping consumers make informed choices.

3. Incentive-Based Models: Instead of penalising, banks could reward customers who maintain higher balances through interest rate bonuses or service benefits.

4. Stricter Regulatory Oversight: RBI could prescribe an upper cap on MAB, ensuring thresholds remain realistic.

5. Public Sector Leadership: Public sector banks could lead by example, offering inclusive account models and forcing private banks to follow.

Conclusion

The ICICI Bank episode has reopened the debate on the legitimacy and fairness of MAB in India. What started as a simple mechanism for operational discipline has today become a profit-centred tool that burdens depositors.

If left unchecked, high MAB norms threaten to undermine the very gains India has made in financial inclusion. As banks chase short-term profitability, the larger social contract of banking—to serve as a public good—risks being eroded.

The road ahead requires a balanced approach, where banks remain profitable but depositors are not unfairly penalised. In a country striving to deepen financial inclusion, banking must be universal, affordable, and accessible—without hidden traps in the fine print.

Five Key Questions and Answers

Q1: Why did ICICI Bank’s MAB hike trigger so much criticism?
A: Because the hike was steep (₹15,000 to ₹50,000 for metros), it disproportionately affected middle- and lower-income customers. It signaled banks prioritising profits over inclusion at a time when households face rising living costs.

Q2: Do banks actually need MAB to cover account costs?
A: With digitisation, per-account costs have dropped significantly. Staff expenses as a share of income fell from 15.14% to 13.75% (2005–2014). This suggests banks can sustain operations without such high MAB thresholds.

Q3: How does MAB conflict with financial inclusion goals?
A: High MAB excludes low-income households, discourages savings, and erodes trust in formal banking. This runs counter to government programmes like Jan Dhan Yojana that aim to bring every citizen into the banking system.

Q4: What alternatives could replace MAB?
A: Tiered accounts with zero-balance options, incentive-based models rewarding high balances, and stricter transparency norms could ensure fairness while keeping banks profitable.

Q5: How does India’s MAB policy compare globally?
A: Unlike India, developed economies emphasise zero-balance basic accounts. In the U.S. and Europe, regulation mandates affordable access. India’s MAB-heavy system appears outdated and inconsistent with global best practices.