By-Dr Mrutyunjaya Sahoo, Assistant Professor, Paari School of Business, SRM University – AP, Amaravati.
Over the past decade, Indian households have altered the way of theysave and invest. Onceheavily reliant on fixed and savings deposits, they are now movingsteadily toward equities, mutual funds, and sovereign gold bonds. The surge in monthly SIP inflows and the doubling of demat accounts highlight this growing preference for market-linked instruments over traditional bank deposits.
The appeal is clear. Market investments have delivered higher returns compared to modest bank deposit rates, while rising financial literacy, fintech access, and favourable tax treatment have encouraged this shift. For households, this means more prospects to grow wealth. But for banks, especially public sector banks (PSBs), the trend brings challenges.PSBs have traditionally depended on household deposits to fund their lending. With deposits slowing, their profit margins are under pressure, liquidity is tightening, and lending capacity is constrained. Private sector banks appear better placed, while many PSBs face a narrowing gap between loans and deposits. Their compulsory investment in low-yielding government securities further limits flexibility.
The Reserve Bank of India has maintained a steady monetary policy stance, preferring caution amid global uncertainties and inflationary risks. Liquidity has been managed through tools like VRRR auctions and open market operations. Thus far, the structural issue of deposit disintermediation requires more than short-term interventions.
Several measures could help. PSBs need to rethink deposit offerings; market-linked or inflation-indexed schemes could make them more competitive. Partnerships with fintech can create hybrid products that combine safety with better returns. At the policy level, incentives to promote long-term savings, particularly for rural households and senior citizens, may help retain deposit flows.
India’s financial system is recent days at an inflexion point. Market-led savings signal a more mature and confident households sector, but banking stability remains vital for credit growth and economic health. In fast-evolving financial landscape, striking a balance between empowering savers and ensuring resilient banks will be key to sustaining this transformation.
