Not worried about bank savings being put into equities: RBI guv Malhotra

RBI Governor Sanjay Malhotra says shift in household savings from deposits to equities is healthy, while urging curbs on mis-selling in bancassurance to protect consumers

Reserve Bank of India (RBI) Governor Sanjay Malhotra on Wednesday said he is not concerned about household savings shifting from bank deposits to equity markets, describing it as a healthy trend.

 

“There is certainly a shift from banking to equity. I think it is a healthy trend for any economy. As it grows, there should be a healthy mix. I think we are moving towards that, and we should not be unduly concerned about that,” Malhotra said, replying to a question on whether further cut in deposit rates will drive away deposits of households from the banking system to the equity market.

 

RBI’s monetary policy committee (MPC) has cut policy repo rate by 100 basis points (bps) so far since February. Consequently, banks have transmitted this cut in policy rate to their deposits and loans. The weighted average domestic term deposit rate (WADTDR) on fresh deposits has moderated by 87 bps consequent to the 100 bps cut by the RBI.

 

The fall in deposit rates will help banks to protect their net interest margins (NIMs) as their cost of funds will go down. However, it may hinder their ability to raise fresh deposits from the households, since interest rates on such offering will now be lower.

 

In July last year, then RBI Governor Shaktikanta Das had, at a public forum, highlighted that households and consumers, who traditionally leaned on banks for parking or investing their savings, are increasingly turning to capital markets and other financial intermediaries. 

 

“While bank deposits continue to remain dominant as a percentage of financial assets owned by households, their share has been declining with households increasingly allocating their savings to mutual funds, insurance funds, and pension funds. To be precise, households are increasingly turning to other avenues for deploying their savings instead of banks”, Das had said.

 

Again during the August 2024 monetary policy, Das instructed banks to offer innovative products and services, and effectively use their branch networks to attract household savings as deposits amid increasing appeal of alternative investment avenues to retail customers.

 

These statements stemmed from the fact that, for over two years, credit growth had been outpacing deposit growth, making it difficult for banks to mobilise deposits and forcing them to increasingly rely on short-term borrowings such as certificates of deposit (CDs) to meet the economy’s credit demand.

 

However, credit growth — having eased from its peak last year — is now trailing deposit growth by a significant margin. As a result, meeting the funding needs of the economy is no longer a challenge, especially with credit demand currently remaining subdued.

 

Also, since Covid-19 pandemic, households had been shifting their investments more to equities, directly as well as through mutual funds (MFs), at the expense of bank deposits since equity markets were delivering strong returns till they turned choppy towards the latter half of 2024. 

 

According to data, household allocation to bank deposits — fixed deposits, savings account deposits, and current account deposits — has come down from 53 per cent in 2020 to 42 per cent in 2024 while during the same period the allocation of household assets to equities, mutual funds, and portfolio management services/alternative investment funds has increased from 15 per cent to 25 per cent.

 

Bancassurance

 

Separately, expressing confidence in the bancassurance channel for distributing insurance products, Governor Malhotra said that when an existing network can be leveraged to sell multiple products, costs are reduced through economies of scale. Additionally, bancassurance supports financial inclusion, particularly in rural areas.

 

“Our endeavour is to prevent mis-selling,” Malhotra said, adding that the focus is on curbing mis-selling, not on preventing the sale of insurance products through the banking channel.

 

Malhotra’s comments on bancassurance comes amid a lot of concern being expressed by stakeholders in the past one year. There has been a lot of discussions around mis-selling of insurance products, with the finance ministry, Insurance Regulatory and Development Authority of India (Irdai), and the RBI governor weighing on mis-selling taking place in the insurance industry through banks via the bancassurance channel.