Banks, which have long paid real negative interest rates to depositors, especially those in the current and savings account (CASA) segment, have recently been offering limited-period schemes with higher rates to attract deposits. However, they now warn of systemic risks if the current deposit flight is not halted.
IBA Chairman MV Rao has called for active government and regulatory intervention to address the shift of money into non-banking assets such as equities and mutual funds. Rao, who also heads the Central Bank of India, warned at the IBA-FICCI national banking summit that if the trend of deposit outflow continues, systemic risks could arise.
Rao noted that; “our analysis of mutual fund investors shows that 99 percent do not evaluate the technical or fundamental aspects of their investments; they simply follow trends. This could pose significant systemic risks when the market cycle turns, as mutual funds invest in companies or stocks and do not make provisions like banks, which must provision 20 percent even for AAA-rated investments.”
He also pointed out that cultural shifts are occurring, with older individuals holding deposits while younger people are increasingly investing. Despite mutual funds offering higher returns, banks are constrained by regulatory limits on deposit rates. Currently, savings accounts yield only 2.75 to 5 percent, depending on the amount, and mid-term fixed deposits offer 6.5-7.3 percent, though interest income is taxed. In contrast, mutual funds often provide higher returns without such restrictions.
For the past two years, credit off-take has been growing at over 15 percent, compared to deposit growth of around 10 percent.