CONTEXT 

ICICI Bank hikes minimum account balance for urban areas to ₹50,000. But why is minimum balance required?

Banks often require a minimum balance or deposit as part of opening and maintaining an account, though the terms can sometimes overlap. A minimum opening deposit is the initial amount (typically ₹2000-₹10,000) needed to fund and activate a new account, while a minimum balance refers to an ongoing requirement to keep a certain amount in the account to avoid fees or penalties.

KEY REASONS

The reasons for these requirements stem from banks' need to manage costs, ensure profitability, and comply with regulations. Let's have a look at them

1. To Cover Operational and Maintenance Costs : Banks incur expenses for account setup, transaction processing, customer service, statements, and digital infrastructure. A minimum balance helps offset these costs, especially for low-activity accounts that might otherwise be unprofitable. Without it, banks might charge monthly fees instead, but the balance requirement encourages customers to maintain funds that cover these overheads.
2. To Ensure Profitability and Generate Revenue : Banks use deposited funds to make loans, investments, and other interest-earning activities. A minimum balance provides a stable pool of money for these purposes, helping banks earn revenue while keeping the account active.
3. To Manage Risk and Regulatory Compliance : Regulations of RBI may require banks to maintain liquidity reserves or capital ratios such as Liquidity coverage ratio (LCR). Minimum balances help banks meet these standards by ensuring aggregate deposits remain sufficient. They also reduce risks like overdrafts or fraud by signaling that the account holder is financially committed. overdraft means that a person is withdrawing more amount than present in his bank account. Some banks allow this, for old trusted customers.
4. To Provide Perks and Avoid Fees for Customers : Meeting a minimum balance often waives monthly maintenance fees, qualifies for higher interest rates, or unlocks benefits like free checks or ATM access. This creates a win-win: banks retain funds longer, and customers get better services without extra charges.

Not all accounts have these requirements—many online banks or Public sector banks waive them to attract customers for example SBI has no minimum balance requirement.