Deposit Roulette

Indian banks are pumping humble investor deposits into high-risk mutual funds under the garb of low-cost financing and better returns. This is a deadly bubble

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"Free enterprise provides you the freedom to gamble and freedom to lose. The great thing here is you don't even have to play to lose." — Barbara Ehrenreich

Thousands of Years: If the Gurus of yore had imparted on their royal shishyas crafts and capabilities that may or may not work in real life, these saintly teachers would have risked running out of business. They would also have been completely missed in today's holy and history books.

Fast-forward to Today: It is irony personified that savings accounts deposits in banks, placed there for the primary purpose of safety, are being slyly invested by bankers in high-risk instruments like mutual funds and stocks. Expertise and financial science aside, it is a tantamount to a gamble.

In the corridors of Indian banking, a quiet transformation is underway. Banks, traditionally seen as custodians of small household savings, are turning into aggressive investors. Using funds that small depositors entrust to them for safekeeping, India's largest banks are betting on mutual funds (MFs), some of which invest in volatile debt or equity markets. With just 2.5 per cent interest on savings accounts and 6-7 per cent on fixed deposits (FDs), banks have access to the cheapest pools of capital in the financial system. That money is now being deployed — not into direct lending or development — but into risky market instruments.

Call it 'financial adventurism' or 'legalized speculation with public funds'. With the Reserve Bank of India slashing repo rates last week, lending margins of banks are shrinking sharply; this has led bankers to chase quick gains, gambling with funds entrusted to them by small depositors. In a nation where 80 per cent of households still prefer to park their money in traditional bank accounts and not stock market plays, this is sleight-of-hand, deceptive... It is also dangerous.