Banks may lose deposits to markets

Banks scouting for more customer deposits are meeting some tough competition from equity and debt markets as savvy investors invest in mutual funds in pursuit of higher returns.

Most people who prefer mutual funds to fixed deposits have moved to equity funds, showed an analysis by Bank of Baroda's research division.

Since the beginning of FY16 and till September this year, total bank deposits grew by ₹77 trillion.

Of that, term or fixed deposits have increased ₹66 trillion, it said, citing a secure interest rate regime and risk-averse sentiment that have worked in favour of banks.

In the same period, mutual fund assets under management (AUM) on a net basis rose 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 were in hybrid and other schemes.

Bank deposit rates now on the rise after several months of stagnation and minor increases as part of asset liability management have been yielding negative returns when adjusted for inflation.

Given that inflation has been above the Reserve Bank of India's (RBI) target of 2-6% between January and September, savers are at the receiving end of the covid-era liquidity slush.

Some believe the decision to keep interest rates low to aid economic growth has led to the neglect of bank depositors.

Experts said savers are becoming less risk-averse and channelling funds to stock market-based instruments.