Falling Bank Deposits and the need for caution

Bank deposits fell to a five-decade low in FY18, unarguably for two reasons. One, the insultingly low interest rates are pushing investors towards small savings schemes. Two, the conservative mum-and-dad savers and the cherished salaried class are getting bolder, embracing market-linked instruments like equities and mutual funds, which are fast emerging as the preferred avenues for rainy day funds. The share of mutual funds in total incremental savings rose from 11.1 per cent in FY15 to 27.5 per cent in FY18, according to Care Ratings.

This migration is clearly because of the juicier returns they offer. In fact, corporates too have been socking away surplus cash in mutual funds than deposits. But investors need to exercise caution as misselling is rampant, and regulation is a bit of a sideshow. Currently, there are over 42 fund houses selling over 2,000 schemes and the target-chasing employees and commission-hungry entities often push schemes with higher commissions, downplaying risks. To avoid this, Sebi wants to segregate distribution and advisory services, and is insisting on full disclosures to customers about commissions. Though this has been discussed for sometime, the final word is not out. 

Lastly, savers’ lost-love with bank deposits could also be due to rising frauds, toxic loans and wilful defaulter cases. However, banks’ bad behaviour isn’t isolated to India. In the US, Wells Fargo was slapped with a $1 billion fine for charging customers for unknown and unsolicited services. Ditto in the UK, where banks repaid 30 billion euros for misselling.

In Australia, the big four are facing trial for scandals including charging fee from dead people, in one case for—hold your breath—a decade! Thankfully, Indian banks’ malice isn’t so deep, but we do have lax regulations, which need to be sewed up tight, right now. Household deposits are a lifeline to banks, without which they will be on ventilators. The least banks should do is to bring rate parity, besides allowing tax benefits, at least on long-term savings, to retain customers.