Bank Deposits vs Mutual Fund : The Indian banking system is expected to witness a significant rise in deposits and advances in 2023-24. Bank deposits are projected to reach 13-14% growth by the end of the fiscal year, while credit growth is likely to surpass this and reach 19-20%. This trend is expected to continue even after excluding the merger of HDFC Bank.
Mutual Funds Not Hobbling Deposit Growth
Bank Deposits vs Mutual Fund
A common misconception suggests that the rise of mutual funds (MFs) is hindering deposit growth in banks. However, data reveals a different story. While the number of new demat accounts and stock market investors has grown considerably, the MF industry’s AUM has also expanded significantly. This indicates that funds are flowing from bank savings accounts to MFs, but they largely stay within the banking system.
Deposits Shifting Between Accounts, Not Leaving the System
When individuals invest in MFs, the money typically moves from their savings accounts to the current accounts of MF distributors. This shift reflects a change in account type, not a net outflow from the banking system. Similarly, redemptions from MFs result in the money returning to the investor’s account.
Data Confirms Minimal Impact of MFs on Deposits
Analysis of deposit trends further strengthens this argument. The share of incremental deposits in savings accounts has decreased, while current account deposits have grown. This signifies a shift towards transactional accounts. Additionally, a recent rise in time deposits reflects individuals seeking better returns on their savings.
Households Prefer Fixed-Income Instruments
Studies show that Indian households are primarily risk-averse, allocating 94% of their financial assets to fixed-income options like bank deposits and government schemes. Only a small portion (6%) is directed towards equity and mutual funds.
Challenges and Opportunities for Deposit Growth
While increased market participation will eventually lead to higher CASA deposits, introducing variable term deposit rates (Bank Deposits vs Mutual Fund) might not be the most effective solution. Past attempts, like the one by SBI in 2001, haven’t received much traction.
A more promising approach could involve
RBI Guidelines: The Reserve Bank of India could mandate banks to mobilize fresh deposits only at floating rates, similar to loans linked to external benchmarks.
Tax Incentives: Offering lower tax rates for deposits with variable interest rates could encourage participation.
Focus on Women-Centric Products
As India strives to become a $5 trillion economy, the banking sector has an opportunity to cater to the growing needs of women. Developing women-centric financial products could be a key strategy to tap into this potential.
In conclusion, despite the rise of mutual funds (Bank Deposits vs Mutual Fund), bank deposits in India are expected to maintain a healthy growth trajectory. Banks need to explore innovative solutions to address the challenge of variable interest rates and cater to the evolving needs of diverse customer segments like women.
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