Who ate the banks’ cake?

There is an irreversible structural shift in the Indian banking system's deposit dynamics

- TAMAL BANDYOPADHYAY

These past few months, the left and right side of Indian banks’ balance sheets have been engaged in a tug-of-war. The left side lists a bank's assets — loans and investments; the right side carries the liabilities — deposits and capital.

Credit growth has outpaced deposit growth on most fortnights of this financial year. As on October 17, year-on-year deposit growth was 9.5 per cent against 11.7 per cent a year ago; credit growth was 11.5 percent, the same during the previous 12 months.

In the current financial year so far, deposit growth has been 5.8 per cent against 6.5 per cent last year; and credit growth, 5.3 per cent versus 4.9 percent.

More than the growth, bankers are concerned about the composition of deposits. The flow of low-cost current and savings accounts (Casa) is thinning. This makes the cost of deposits higher for banks and impacts their net interest margin (NIM), loosely the difference between what a bank pays its depositors and earns from loans. The quality of loan assets and NIM are the two key contributors to a bank’s profit.

What is behind the drop in the flow of Casa? One factor is the growing financialisation of savings - a shift from bank deposits to mutual funds and equities.

This trend, accelerated significantly since the Covid-19 pandemic, is a critical structural change the banking system must learn to live with. The mutual fund industry’s assets under management (AUM) have grown significantly faster than bank deposits over the last decade. The ratio of mutual fund AUM to bank deposits has shot up from around 12 per cent to around 32 percent.

The growth in AUM is primarily driven by the increasing popularity of systematic investment plans (SIPs), which suck money out of banks’ Casa. Incidentally, some of the large MFs are managed by banks.