Banks may lose deposits to the market | Techy Kings

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MUMBAI : Banks seeking more customer deposits face stiff competition from equity and debt markets as smart investors invest in mutual funds to chase higher returns.

Most people who prefer mutual funds to fixed deposits have shifted to equity funds, shows an analysis by the research division of Bank of Baroda. Since the beginning of FY16 and up to September this year, total bank deposits increased by 77 trillion. Of that amount, term or fixed deposits have increased 66 trillion, he said, citing a safe interest rate regime and risk-averse sentiment that have favored banks.

Tough competition

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Tough competition

During the same period, mutual fund assets under management (AUM) on a net basis increased 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 are in hybrid schemes and others. “An interesting revelation is that growth in assets under management has been higher than deposits throughout the year, except for FY20, which was affected by the end-of-month panic caused by the closure announcement. This is due to both lower fundamentals as well as increased household interest in mutual funds,” the Bank of Baroda report said.

Bank deposit rates—now rising after months of stagnation and small increases as part of asset-liability management—have produced negative returns when adjusted for inflation. As inflation has exceeded the Reserve Bank of India’s (RBI) target of 2-6% between January and September, savers are at the receiving end of covid-era liquidity. Some believe the decision to keep interest rates low to help economic growth has led to the abandonment of bank depositors.

Experts say savers are becoming less risk-averse and channeling funds into stock market-based instruments.

“Financial repression in the form of a two-year ultra-low interest rate regime unleashed by India’s monetary and fiscal authorities is also responsible for forcing people to take more risks and seek better returns through equity investments,” he said. Ajay Bodke, an independent market analyst.

That said, Bodke pointed out that the base of equity investors has broadened over time and is no longer limited to a handful of communities in large metros. Even in smaller cities, people are impressed with the returns from the equity market compared to other investment avenues, he said.

Arbitrage between returns from market-linked instruments and bank deposits has led to the flight of some rate-sensitive customers. Changes in customer interest can also be seen among savings account depositors, where rates have declined over the past few years.

“Interest rates in current and savings accounts (Casa) have decreased over the past few years. Hence, retail depositors have shifted to equity markets. This trend is likely to continue as investors are looking to optimize liquidity and returns by maintaining only minimal levels 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 interest rates on savings deposits and returns on liquid funds has widened, some bulk savings deposits have shifted to liquid funds.

“However, the bank has seen good growth in the granular savings deposit book, which shows the core strength of the savings franchise,” Diwanji told analysts on October 22.

Meanwhile, easier market investment options through fintech have also opened up more opportunities for savers.

Protiviti’s Doshi said that fintech is attracting retail investors by significantly simplifying the investment process. “Investing in the market is no longer a scary proposition for uninformed investors,” he said.

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