The money never really left the bank: Bill for repricing has now arrived

Mutual funds did not drain India's deposits. Banks repriced their own liabilities - and the bill has now arrived

Every few months a familiar anxiety surfaces in Indian banking — that the investor awareness slogan Mutual Funds Sahi Hai worked rather too well; that a generation which once queued at a branch counter now opens a Systematic Investment Plan (SIP) on a phone during the lunch break; and that the deposit base is draining away, rupee by rupee, into the equity market.

 

It is a compelling story. Numbers, however, tell a different tale.

 

The arc, routinely read backwards

 

FY21 was not a trough in Indian household saving. It was the peak. Net financial savings reached ₹22.81 trillion as households sat on cash and repaid debt through the pandemic. The ‘fifty-year low’ headlines that followed in FY23, when the figure fell to ₹13.90 trillion, were measuring the descent from that spike — compounded by a borrowing surge that took household liabilities from ₹9 trillion to ₹16 trillion in 12 months. Households had not stopped saving. They had started borrowing.

 

Meanwhile, the pool grew hard: Gross household financial assets rose from ₹24.07 trillion in FY20 to ₹42.90 trillion in FY26, up 78 per cent. Every major instrument grew in absolute terms. This was never a zero-sum contest.

 

Mutual funds grew the fastest, and by a distance — roughly ninefold, lifting their share of household financial assets by 10.2 percentage points. The financialisation of Indian savings is, undoubtedly, entirely real. Mutual Funds Sahi Hai has undoubtedly worked. The only question worth asking is what it displaced. 

 

The money came from almost everywhere, except banks

 

Direct equity ceded 2.97 percentage points. Small savings ceded 2.92. Life insurance ceded 2.45. Currency ceded 2.07. Bank deposits, however, ceded a mere 1.04 — the second-smallest loss of any category on the list.

 

Apparently, households did not move money out of banks and into mutual funds. They swept up a scattered heap of small, informal and self-directed holdings — post office schemes, cash in the almirah, a few inherited shares, a traditional endowment policy sold by a cousin — and handed it to professional mutual fund (MF) managers. The post office’s and life insurance companies’ traditional books lost a great deal more than the banking system did. Neither has held a press conference about it.

 

The deposit numbers settle it. Across seven years spanning a pandemic, an inflation shock, a credit boom and a bull market, the deposit share of household financial assets moved from 36.7 per cent to 35.7 per cent. It has been as high as 40.5 per cent and as low as 31.8 per cent, with no discernible direction. And the FY26 deposit flow was an all-time record of ₹15.32 trillion, 22 per cent more than the year before. Any thesis about households abandoning banks has to account for the most recent observation, and cannot.

 

None of which means the banks are fine

 

They are not. But the wound is hardly due to Mutual Fund Sahi Hai. It is in a different place entirely, and it is seemingly self-inflicted.

 

System Casa (current account and savings account ratio) peaked at 44.79 per cent in March 2022 and has fallen every single year since, to 38.40 per cent in March 2026 — now 3.26 percentage points below its pre-pandemic level, so this is well past normalisation from a Covid liquidity bulge. Household CASA travelled the same road, from 50.41 per cent to 45.25 per cent.

 

Decompose that 6.39 percentage point fall and households account for 74 per cent of it. Within their share, the mix effect — households moving their own money from savings into term deposits — outweighs their loss of deposit share by roughly two to one. And the damage is almost entirely in savings accounts rather than current accounts: Savings fell 5.84 percentage points of the system mix, current accounts just 0.54 percentage points.

 

So the money never left the bank building. It was repriced in place — walked from a savings account paying around 2.50 per cent interest to a term deposit paying about 6.5 per cent, a journey of perhaps fifteen feet, frequently at the same counter, occasionally assisted by the same relationship manager and, sometimes by the mobile banking app.

 

And why not? Over the same period banks cut the savings rate from a range of 2.70-3.00 per cent to a flat 2.50 per cent, while term deposit rates went up. A 400-basis-point gap opened, and households walked through it, as any sentient depositor would. This was not a competitive defeat at the hands of the mutual fund industry. It was a pricing decision taken by the banking industry itself, one rate card at a time.

 

What the industry should do — and in what order

 

Two things. The order matters more than either.

 

The first is a category campaign Indian banking has collectively never once attempted. At present every bank advertises its own fixed deposit rate, which is less a marketing strategy than an unspoken arrangement to pay more for the same money. The Association of Mutual Funds in India or AMFI did the opposite in 2017: An industry-funded, non-comparative campaign that built a category rather than a brand, and never attacked fixed deposits even once. Eight years on, the banking industry is still complaining about the results.

 

The banking equivalent, more or less, writes itself: Pehle Bachat, Phir Nivesh — save first, then invest. It is deliberately non-confrontational, conceding that investing is right and claiming only the step immediately before it. Every financial planner in the country already tells clients to hold six months of expenses in liquid form before they invest a rupee. The banking industry has simply never said this out loud, being otherwise engaged in advertising 7.25 per cent for 444 days. It is unarguable, it is true, and it hands the savings account the one thing it has never had — a target balance.

 

A campaign alone, however, would be theatre. The second point is the one that decides whether any of this works.

 

The caution, with the maths attached 

 

The instinct is to close the savings-to-term gap by lifting the savings rate. The arithmetic disagrees, and it is worth seeing why.

 

Lifting the savings rate to 4 per cent across the board would need 17.25 percentage points of the deposit base to march back before it broke even, taking savings deposits to 46 per cent of the system, a level never reached in the published series. The back book swallows the retention benefit whole. To some extent, some of the private banks have tried this in the past with some degree of success.

 

Run it the other way and the picture inverts — 25 bps off the term deposit rate is worth 0.154 percentage points of blended cost. And 25 bps onto the entire savings book costs 0.072. The term book is 2.1 times the size of the savings book and carries 2.1 times the leverage. The gap is, therefore, better closed from the top rather than the bottom — through TD rates converging towards a policy rate already sitting at 5.25 per cent per annum.

 

Of course, that’s easier said than done. We are assuming minimal loss of deposits at lower rates.

 

Where savings rates should move, they should move in tiers, and a few banks do this. The Reserve Bank deregulated the savings rate in October 2011, permitting differential rates above Rs 1 lakh; most of the industry promptly converged on a single number and has left the tool in the drawer ever since. Tiering confines the cost to the money actually at risk of leaving. With 40 per cent of the savings book above the threshold, break-even needs 6.9 percentage points of retention rather than 17.25 — which is demanding but no longer a fantasy.

 

Pehle bachat, phir nivesh, as an industry-wide campaign is great, but one line must not be crossed. Deposit rates are the purchase price of funds, and any coordinated approach to setting them is a cartel, however collegially it is arrived at. The campaign can be jointly funded, the pricing cannot. That distinction is worth writing down before anyone says the second half of it aloud in a room that keeps minutes.

 

The wrong door

 

For four years, Indian banking has stood at the front door, watching anxiously for its deposits to walk out towards the mutual fund industry. The deposits never did. The furniture was being rearranged behind them the entire time — the same money, the same customers, the same institutions, quietly moving from the cheapest liability on the balance sheet to one of the dearest.

 

The deposits never left. They simply stopped being cheap. And they stopped being cheap because the industry, patiently and profitably, and one rate card at a time, told them to. A successful raise of FCNR (B), or foreign currency non-resident (bank) deposits by the industry may just offer the right trigger to drop term deposit rates and promote pehle bachat, phir nivesh.

 

• All figures are drawn from the Reserve Bank of India publications: the Bulletins of March 2023, March 2024 and July 2026, and the Basic Statistical Return on deposits with scheduled commercial banks, March 2020 to March 2026. FY26 household flow data is preliminary and subject to revision.

 

The authors are retired bankers and have earlier worked at Kotak Mahindra Bank. Views expressed are personal.

 

Disclosure: Entities controlled by the Kotak family have a significant holding in Business Standard Pvt Ltd