Deposit shortage: challenges facing India's banking ecosystem

In any macroeconomic framework, the household sector plays a critical role as a driver consumption, savings, and overall economic activity.

- B Saptarshi Roy Bardhan

Household consumption is primarily influenced by income and wealth. In India, the household sector has traditionally favored fixed deposits (FDs) in banks and other small savings instruments such as postal schemes and Public Provident Fund (PPF), which offer fixed returns. Known for their low risk, guaranteed returns, and flexible tenure, FDs-particularly those from scheduled commercial banks have been popular among the elderly, who prefer the security of passive income. Additionally, five-year bank deposits remain a favored investment for tax-paying individuals who can claim tax deductions under Section 80(C) of the Income Tax Act.

A deeper analysis shows that India's middle class grew from 14% in 2004-2005 to 31% in 2021-2022. However, limited disposable income after meeting financial obligations has led middle-class investors to prioritize low-risk investment options. With rising incomes and greater financial responsibilities such as better education, healthcare, and ensuring a stress-free future many are riskaverse and shy away from market-linked investments.

However, preferences for FDs have evolved. Inflation has eroded the real rate of return on FDs, making them less attractive. An article titled "Estimating the Financial Wealth of Indian Households," published in the RBI's July 2023 bulletin, highlighted that while deposits have maintained their dominance in household financial wealth over the last decade, there has been increasing interest in other investment options, such as equities, mutual funds, and insurance. The share of equities in total financial wealth has surged by over 50% between 2011-12 and 2022-23. Bank deposits, which once made up more than half of the financial wealth portfolio before 2011, have fallen to 43% as of March 2023.