Is ICICI Bank’s upmarket leap a sign of the times?

Today, it is ICICI Bank, the country’s second-largest bank in the private sector, that has had to face some criticism. Last week, ICICI Bank raised its minimum balance requirement for new savings accounts—opened on or after 1 August—at urban bank branches from ₹10,000 to ₹50,000. For semi-urban and rural accounts, the least average that must be held was also enlarged five-fold to ₹25,000 and ₹10,000 respectively.

Account holders who fail to meet this condition would have to pay a penalty worth 6% of the shortfall, or ₹500, whichever is less. However, holders of salary accounts, PM Jan Dhan accounts and basic savings bank deposit accounts are exempt, as these are zero- balance accounts.

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Predictably, the bank’s decision has come in for much flak for being discriminatory; Jay Kotak, son of a rival private sector bank’s promoter Uday Kotak, pointed out that 90% of Indians make less than ₹25,000 a month. The Reserve Bank of India has so far chosen to steer clear of the controversy; Governor Sanjay Malhotra made it clear that the matter does not fall under the regulator’s domain. Banks in India have the freedom to decide the minimum balance they want kept in their savings deposit accounts.

The governor is spot on. This was a business decision for ICICI Bank to take in the interest of its shareholders. Only posterity will tell how sound it is. ICICI Bank’s upmarket move turns its back on a principle we have long held dear: that we must foster equality of access to essential services like banking. It also comes at a time when public sector banks have either lowered their minimums or waived them altogether.

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In the debate over class versus mass banking, the latter wins hands down from the stability point of view. One need not consult the law of large numbers to recognize that core current and savings account deposits are much less volatile when there are many of them with small balances, rather than a few accounts with large balances.

An example of the latter was Northern Rock, a UK-based mortgage lender that collapsed spectacularly during the infamous financial crisis of 2007-08, thanks to its dependence on the wholesale market for lending funds.

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Instead of seeking regulatory intervention, we need to watch where market forces take ICICI Bank, which may have estimated that an upmarket profile would serve its business aims better. According to a Mint report, it does not want to be the second bank of any customer, but the primary one. Moreover, it expects to count on rising incomes across the country.

Another benefit of such a high bar for new customers could be that it keeps dodgy ‘mule accounts’ out. In general, though, is this a sign of things to come in this sector? What’s clear at this point is that private and public sector banks march to different tunes. Critics of the latter should remember this each time they try to judge them by the same yardstick as their private sector counterparts.