A classic scramble for deposits has erupted among banks again

Low interest rates, bank inertia and structural changes have made deposits hard to find in the face of rising credit demand

- RAJRISHI SINGHAL

Things declared obsolete prematurely have a way of pushing back. A critical component of ‘boring’ banking—ordinary deposits—is having a moment because Indian banks are faced with a depleting deposit stream, thus pushing up costs and squeezing margins. The traditional market for deposits is also undergoing some serious structural changes, which is likely to impact bank performance over the next few quarters.

Two developments have led to a deceleration in deposit growth. First, years of regulatory obsession with keeping nominal interest rates low (even after real rates occasionally turned negative) diverted part of the country’s incremental household savings to alternative assets, such as mutual funds. This was manifest when the mutual fund industry’s assets under management crossed ₹50 trillion in December 2023. To put the number in context, the comparable figure in December 2013 was only ₹884,631 crore. Category-wise data from the Association of Mutual Funds in India points to another interesting trend: at end-September 2023, household investment (retail plus high net worth individuals) in equity mutual funds was three times the sum of wholesale investments (corporates and banks plus foreign portfolio investors).