Bank Imbalance

As investors turn to more lucrative options, banks in India are seeing sluggish growth in deposits. With a limited arsenal to compete with high returns available elsewhere, they are struggling to balance deposits with the amount of loans they are handing out

- Ayaan Kartik and Harshita Dudeja

Twenty-six-year old Nikhil Tyagi, a digital marketer working in Delhi, says he never thought of investing in fixed deposits (FDs). He puts all his savings in stock markets and mutual funds (MFs), encouraged by the 29% returns he has earned so far.

Lucknow-based Rakesh Mishra (name changed), 55, does not invest more than 40% of his total savings in MFs and stocks and has a good amount of savings in FDs, public provident fund and other traditional instruments. However, in the last one year, he has withdrawn a substantial amount to invest in real estate, confident that it will give good returns in the long run.

Tyagi and Mishra mirror the sentiments of an increasing number of people who are willing to trade the safety of bank deposits and their low returns for more profitable, even if riskier, assets. They do not believe traditional investment instruments offered by India's banking sector can deliver the returns they want in the long run. However, for the banks, this public wisdom means a threat to their growth prospects-deposits are good sources of bank lending.

Not Quite Lucrative

At a time when inflation has been in the range of 5%-6%, average returns offered by banks on several instruments range from 3%-9%. On the other hand, stock markets are witnessing a prolonged bull run. Benchmark Nifty delivered over 20% returns in 2023. The number of demat accounts in the country has increased from four crore in April 2020 to 15.4 crore in April 2024.

The net financial savings of Indian households fell from 11.5% of GDP in 2020-21 to 5.1% of GDP in 2022-23. As per Reserve Bank of India (RBI) data for households, banks received Rs 12.4 lakh crore as deposits in 2020-21. This figure fell to Rs 10.2 lakh crore in 2022-23. At the same time, investment in MFs increased from Rs 64,000 crore in 2020-21 to Rs 1.7 lakh crore two years later.