Time to Take a SIP of Deposits

Normally, when bankers lose sleep, it is over defrauding borrowers and runaway NPAs. These days, however, what keeps Indian bankers awake is the problem of dwindling deposit growth. 

Bad loans can send a bank crashing in no time. The impact of deposit deceleration, by contrast, is more gradual and less visible, which is why it is often treated as a lesser concern. This muted threat perception may explain why the issue does not receive adequate attention from policymakers and industry commentators.  

However, this is not a problem to be taken lightly. A persistent mismatch between deposit and credit growth creates structural imbalances, which eventually stifle lending. Over time, smaller and less powerful banks risk being squeezed out as liquidity, the oxygen that sustains banking, begins to dry up. 

The asynchronous growth of assets and liabilities is not new. It surfaces periodically during credit upcycles, when advances grow rapidly, while deposits struggle to keep pace. This time, however, the imbalance has a different origin. 

It is being driven less by a cyclical lending boom and more by the re-channelling of domestic savings into equity markets. In other words, the present anomaly is more structural than frictional, and therefore far more concerning. 

Before going further, let us address the oft-repeated argument that diversion of savings into capital markets does not hurt bank deposits because money never leaves the banking system; it merely changes hands. 

While superficially true, this argument ignores the finer distinctions between different kinds of deposits. When money moves from a savings account into a stock exchange pool account, it turns from a stable retail liability into volatile “hot money”. When placed in term deposits, the same funds become even stickier and more reliable. 

Banking is built on maturity transformation (using shorter term funds for longer tenor lending). For this model to keep working, banks require a regular supply of stable and sticky funds. This need has only intensified since the 2008 global financial crisis, when liquidity became as important as solvency. 

Today, banks must set aside a large part of volatile funds as liquidity buffers to meet RBI’s liquidity coverage ratio norms, rendering much of this money unusable for lending.  In short, all deposits are not created equal. Banks need stable funds (read retail deposits) to grow advances. Unstable funds end up as RBI balances or as statutory liquidity investments. 

Moreover, a continuous flow of savings into financial markets inflates asset prices without any linkage to fundamentals. This creates a self-reinforcing loop. History suggests that such bubbles have only one eventual outcome. Therefore, restoring retail deposit growth is essential, not only for banking stability, but also for maintaining rational financial markets. 

Liquidity Crunch
So far, we have outlined the problem. The harder question is: what to do about it? 

A problem of this nature would need a multi-pronged approach, no doubt, but, in our opinion, financialisation of bank deposits should be the cornerstone of any policy response aimed at addressing it.

Today, most Indians use Systematic Investment Plans as their primary investment vehicle. It is the cumulative power of millions of SIPs — adding up to ₹300 billion per month — that dominates retail equity flows. Why not harness the same power to deliver a steady flow of high-quality funds to banks?  

This would require reimagination of bank deposits as market instruments, essentially retailised certificates of deposits, distributed through mutual funds or held as exchange-traded securities in demat accounts. 

Recently, SEBI chief lamented about poor investor awareness of corporate bonds. What better gateway to fixed-income markets than the familiar and trusted bank deposit, offered in securitised form? 

At present, CDs are used mainly by financial institutions and mutual funds for fund management and portfolio balancing. By leveraging digital distribution networks such as Zerodha and Groww, along with UPI-based payments, CDs can be transformed into a genuine retail product. 

Even today, many fund managers park portions of inflows in CDs while earning equity-level management fees on these allocations. Democratising CDs would lower entry costs, improve transparency, and provide investors with a low-risk, high-liquidity option. 

For banks, this would mean more predictable demand and better price discovery.  

Of course, significant detailing and brainstorming is needed before this concept can progress from ideation to execution stage. The existing product would need customisation for digital distribution, along with reforms relating to longer maturities, insurance coverage, and stamp duties. 

Yes, there is considerable ground to cover. But the underlying value proposition is strong enough to justify the time and effort.  

We stand at a fork in the road. Staying on the current path could lead to an oligopolistic landscape dotted with a few mega banks. The alternative offers the prospect of a more diverse and layered banking ecosystem, where customers retain real choice and voice, and not all institutions are “too big to fail”.  

*Views are personal