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Widening credit-deposit gap has attracted RBI’s attention as it increases systemic risk in the banking system. Credit growth at 15.5% continues to be higher than 11.7% deposit growth. RBI Governor Das has highlighted that households are increasingly choosing capital markets over traditional banks for investing or storing their savings. “While bank deposits continue to remain dominant as a percentage of the financial assets owned by the households, their share has been declining, with households increasingly allocating their savings to Mutual Funds, Insurance Funds, and Pension Funds.”
While many see a big correction coming, the flow of retail investment indicates it may not be as big as expected. Raamdeo Agrawal, chairman of Motilal Oswal Financial Services, told ET recently that a sharp correction may not happen. “My sense is there will be far fewer corrections or shallower corrections. If there is a deeper correction – let’s say the market goes down by around 5%, there is still tons of money waiting on the sidelines to buy it. Given such a situation, upsides will be guaranteed while downsides will be very limited. So, it will be very frustrating for anybody waiting for a sharp fall in the market.”
The challenge for banks: How to get the depositors back
Financial savings in India are undergoing a structural shift with savers wanting to invest in higher-yielding investments. As a result, mutual funds, insurance, pensions and real estate are being increasingly preferred by younger savers seeking a higher yield. Deposits are also tax inefficient with tax charged according to the applicable tax slab from day one of the investment and tax deducted at source even before the deposit matures.
As per the Economic Survey 2024, the registered investor base at NSE has nearly tripled from March 2020 to March 2024 to 9.2 crore as of 31 March 2024, potentially translating into 20 per cent of the Indian households now channelling their household savings into financial markets.
Individual investors today are over 9.5 crore and have nearly 10 per cent direct ownership of the market through its almost 2500 listed companies. This translates to around ?36 lakh crore of wealth as of March 2024, apart from indirect ownership in equity mutual funds that have ?28 lakh crore in assets under management (AuM).The Indian capital markets have seen a surge in retail activity through direct (trading in markets through their accounts) and indirect (through mutual funds) channels in the last few years. The individual investor’s share in the equity cash segment turnover was at 35.9 per cent in FY24. The number of demat accounts with both depositories rose from 1,145 lakh in FY23 to 1,514 lakh in FY24. The impact of this influx of individual investors in the market is also reflected in new investor registrations with the exchanges, their share in total traded value, net investments, and ownership in the listed companies. For instance, the registered investor base at NSE has nearly tripled from March 2020 to March 2024 to 9.2 crore as of 31 March 2024, potentially translating into 20 per cent of the Indian households now channelling their household savings into financial marketsBankers say they cannot offer astronomical rates on deposits because it will impact profitability. However, changes in tax treatment to ensure TDS is not charged before maturity could help. They expect savers to come back to the safety of deposits when the stock market corrects.
SBI MD Tewari said his bank is also looking at the small-ticket deposits from the decade-old Prime Minister Jan Dhan Yojana across its vast network as well to drive its deposit growth.
Banks are taking greater recourse to short-term, non-retail deposits and other instruments of liability to meet credit demand. But RBI Governor Das has warned banks about asset liability mismatches that could occur if banks raise a higher amount of short-term bulk deposits. He has asked banks to be innovative in garnering deposits at a time when households are shifting savings to other avenues. He urged banks to focus more on mobilisation of household financial savings through innovative products and service offerings by leveraging fully on their vast branch network.
The other argument
The share of bank deposits in gross financial savings of households has fallen to 29.4% from its long-term average of 33%, whereas the share of mutual funds has risen considerably to 6% from 2%. Interestingly, a statistical study has failed to find a clear correlation between Indian households are putting money in mutual funds and bank deposits going low.
A time series analysis between mutual funds and bank deposits was conducted by Bank of Baroda economist Dipanwita Mazumdar recently. The test results show no causality between mutual funds and bank deposits, as per an ET Markets report.
A contra argument doing the rounds in favour of the asset management industry is that even if individuals are moving deposits to mutual funds, the money must finally rest with banks as it will only mean transfer from a retail to a corporate account. “There is merit in this argument and this could possibly be the reason as to why we have not been able to determine a causal relationship in this analysis. Also both the variables have been increasing during this period and hence a negative relation is not visible even though the pace of growth in deposits has slowed down. Interestingly RBI data shows that on an annual basis the share of mutual funds in total deposits is insignificant and has not changed over time,” Mazumdar said.