Banks may lose deposits to mkts

3 min read . Updated: 31 Oct 2022, 12:02 AM IST Shayan Ghosh

Bank deposit rates have been yielding negative returns when adjusted for inflation. (Photo: Mint) — Bank deposit rates have been yielding negative returns when adjusted for inflation. **(Photo: Mint)**

The arbitrage between returns from market-linked instruments and deposits has led to the flight of some rate-sensitive customers

MUMBAI : Banks scouting for more customer deposits are meeting some tough competition from equity and debt markets as savvy investors invest in mutual funds in pursuit of higher returns.

Most people who prefer mutual funds to fixed deposits have moved to equity funds, showed an analysis by Bank of Baroda’s research division. Since the beginning of FY16 and till September this year, total bank deposits grew by ₹77 trillion. Of that, term or fixed deposits have increased ₹66 trillion, it said, citing a secure interest rate regime and risk-averse sentiment that have worked in favour of banks.

In the same period, mutual fund assets under management (AUM) on a net basis rose by ₹26.1 trillion. Most of the mobilization was in equity funds, which increased ₹10.8 trillion, while debt funds saw a slower growth of ₹4.8 trillion, the report said. The rest were in hybrid and other schemes. “A striking revelation is that growth in assets under management has been higher than deposits in all years, barring FY20, which was affected by the month-end panic caused by the announcement of the lockdown. This was due to both a lower base as well as increasing interest of households in mutual funds," the Bank of Baroda report said.

Bank deposit rates—now on the rise after several months of stagnation and minor increases as part of asset liability management—have been yielding negative returns when adjusted for inflation. Given that inflation has been above the Reserve Bank of India’s (RBI) target of 2-6% between January and September, savers are at the receiving end of the covid-era liquidity slush. Some believe the decision to keep interest rates low to aid economic growth has led to the neglect of bank depositors.

Experts said savers are becoming less risk-averse and channelling funds to stock market-based instruments.

“Financial repression in the form of a two-year long ultra-low interest rate regime that has been let loose by India’s monetary and fiscal authorities is also responsible for forcing people to take more risk and look for better returns through equity investing," said Ajay Bodke, an independent market analyst.

That said, Bodke pointed out that the base of equity investors has widened over time and is no longer restricted to a handful of communities in large metros. Even in smaller towns, people are in awe of the returns from equity markets compared to other investment avenues, he said.

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The arbitrage between returns from market-linked instruments and bank deposits has led to the flight of some rate-sensitive customers. The change in customer interest is visible among savings account depositors as well, where rates have gone downhill in the past few years.

“Interest rates in current and savings accounts (Casa) have decreased in the past few years. Hence, retail depositors have been moving away towards the equity market. This trend is likely to continue as investors are looking to optimize liquidity and returns by keeping only the bare minimum in CASA," said Dipesh Doshi, managing director of financial services at consulting firm Protiviti India.

Virat Diwanji, group president and head of consumer banking at Kotak Mahindra Bank, said as the gap between the interest rate on savings deposits and returns on liquid funds widens, some bulk savings deposits have moved to liquid funds.

“However, the bank has observed good growth in the granular savings deposit book, which denotes the core strength of a saving franchise," Diwanji told analysts on 22 October.

Meanwhile, easier market investing options through fintechs have also opened up more opportunities for savers.

Doshi of Protiviti said that fintechs attracted retail investors by significantly simplifying the investment process. “Investing in the market is no longer a daunting proposition for less savvy investors," he said.

ABOUT THE AUTHOR

Shayan Ghosh

Shayan Ghosh is a national writer at Mint reporting on traditional banks and shadow banks. He has over a decade of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.