Households are choosing mutual funds over the bank deposits to invest their savings, highlighted RBI Governor Shaktikant Das. He said that traditionally banks were the primary choice for investment. However, there has been a noticeable change in consumer behaviour, with a growing preference for capital markets and other financial intermediaries.
Speaking at FE Modern BFSI Summit 2024 on Friday, Das cautioned that deposit growth, which has been lagging credit growth for a while, may expose banks to structural liquidity issues. Das said there has been a shift in customer preference from bank deposits to mutual funds, among other investments.
The governor said that while loans ultimately return to banks as deposits, the current regulatory concern stems from the fact that there could be structural changes happening which banks need to recognise and, accordingly, devise their strategies.
While bank deposits remain a dominant component of household financial assets, their share is on a decline, the governor said. More households are now opting to allocate their savings to mutual funds, insurance funds, and pension funds.
The shift in investment patterns carries significant implications for the banking sector. Das indicated that banks must explore new methods to manage the gap between credit and deposits.
“On their part, banks have sought to fill the credit-deposit gap by increasing their reliance on other sources like short-term borrowings and certificates of deposit, etc. This increases their sensitivity to interest rate movements and poses challenges to liquidity management,” he added.
Additionally, the Governor highlighted the transition from CASA (Current Account Saving Account) deposits and the need for banks to be adaptive and vigilant. He urged banks to consistently focus on refining their credit underwriting standards and risk pricing to maintain stability and profitability.
Governor Das highlighted past global banking crises, such as those in the US and Switzerland in 2023, which underscored the vulnerabilities in certain business models inherent in banking.
“The banking crisis in the US and Switzerland in 2023 has again brought into focus the risks to banking stability from certain business models and their inherent vulnerability,” he said.
Governor Das concluded by emphasizing that the banking sector must learn from these crises to enhance its resilience.
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