Who ate the banks' cake? Indian banking sees structural deposit shift

As deposit growth lags credit expansion, Indian banks face shrinking low-cost Casa inflows, rising funding costs, and structural shifts driven by UPI, e-Kuber, and digital savings trends

These past few months, the left and right side of Indian banks’ balance sheets have been engaged in a tug-of-war. The left side lists a bank’s assets – loans and investments; the right side carries the liabilities – deposits and capital.

 

Credit growth has outpaced deposit growth on most fortnights of this financial year. As on October 17, year-on-year deposit growth was 9.5 per cent against 11.7 per cent a year ago; credit growth was 11.5 per cent, the same during the previous 12 months. 

In the current financial year so far, deposit growth has been 5.8 per cent against 6.5 per cent last year; and credit growth, 5.3 per cent versus 4.9 per cent. 

More than the growth, bankers are concerned about the composition of deposits. The flow of low-cost current and savings accounts (Casa) is thinning. This makes the cost of deposits higher for banks and impacts their net interest margin (NIM), loosely the difference between what a bank pays its depositors and earns from loans. The quality of loan assets and NIM are the two key contributors to a bank’s profit. 

What is behind the drop in the flow of Casa? One factor is the growing financialisation of savings – a shift from bank deposits to mutual funds and equities.

 

This trend, accelerated significantly since the Covid-19 pandemic, is a critical structural change the banking system must learn to live with. The mutual fund industry’s assets under management (AUM) have grown significantly faster than bank deposits over the last decade. The ratio of mutual fund AUM to bank deposits has shot up from around 12 per cent to around 32 per cent.

 

The growth in AUM is primarily driven by the increasing popularity of systematic investment plans (SIPs), which suck money out of banks’ Casa. Incidentally, some of the large MFs are managed by banks.

 

In the past five years, mutual fund AUM has more than tripled, while bank deposits have grown by a little over 70 per cent. Of course, it's not the fresh flow of money alone; the rise in the value of equities, too, has contributed to this. The return on equity is far higher than in bank deposits. For banks, dependence on high-cost bulk deposits and certificates of deposit (CDs) is rising, replacing low-cost Casa.

 

Corporate India, too, is keeping surplus cash in liquid funds because of high liquidity, low risk, and better returns than bank accounts.

Of course, money ultimately returns to banks – but in the form of CDs, bulk deposits, and commercial papers for which they need to pay higher interest rates.

 

Since February, the Reserve Bank of India (RBI) has cut the policy rate by one full percentage point to 5.5 per cent, leading to a drop in lending rates, but for most banks, the deposit costs remain high. It’s another matter that any change in the loan rate takes effect immediately, while deposit rates cannot be changed till maturity.

 

The weighted average rate on new rupee term deposits rose by 4 basis points (bps) month-on-month in September – the first such increase since the RBI kicked off the rate-cutting cycle in February. In contrast, the weighted average lending rate of new rupee loans stood at 8.50 per cent in September 2025, down 24 bps from the previous month. The lending rates of banks have fallen 90 bps since February. One bps is a hundredth of a percentage point.

 

It is an “adverse margin environment”. In October, the banking system’s credit-deposit ratio exceeded 80 per cent for the first time in six months. This intensifies the fight for deposits as banks need money to lend.

 

Changes in consumer behaviour, government policies, and technology are responsible for the depletion of Casa, the cheapest source of funds – current accounts earn no interest, and savings accounts earn far lower than fixed deposits. In the September quarter, most banks have shown a compression in Casa. Five private and three public sector banks still have a Casa of 40 per cent or more, but, overall, the percentage of cheap deposits has been slipping every quarter.

 

The Casa ratio for the entire banking system dropped to about 36 per cent in June 2025, from around 43 per cent during the pandemic. Typically, current accounts make for around 12 per cent of Casa. The CA is on the higher side for banks with a strong presence in the collection accounts space. Collections from merchants, and payments from the Unified Payments Interface (UPI) and credit cards are parked in these accounts, which ensure a longer retention period for Casa.

 

UPI’s rapid growth has significantly changed deposit-retention dynamics. The surge in digital transactions has decreased the average time of money staying in bank accounts. The earlier T+1 cheque clearance system, which allowed banks to hold customer funds for days, is replaced by instant UPI transfers. Money is moving at electrifying speed now, with digital payments making up at least 99 of transaction volume and around 97 of value. As a result, savings accounts have become just transit points for funds instead of a parking place.

 

Government funds, which used to make up about 10 per cent of Casa, have disappeared due to the introduction of Just-In-Time fund management principles.

 

From mid-July, all central government payments of over Rs 75 crore have been routed through the RBI’s e-Kuber platform. This amount is expected to decrease to Rs 50 crore in the next financial year.

 

The e-Kuber, a centralised, electronic platform for managing government and inter-bank transactions, has fundamentally changed the government fund movement through the banking system. It allows real-time, paperless transactions, providing a single, integrated system for government finances and a streamlined way for commercial banks to access their accounts with the RBI.

 

The Just-In-Time fund management system is implemented through a Single Nodal Account system. Government funds are no longer kept at state capitals, district offices, or block-level branches. Central accounts are only replenished after the state governments provide full utilisation reports. This efficient management of funds by government entities — keeping money in zero-interest accounts with commercial banks for the shortest time — has removed a key source of low-cost deposits for banks.

 

Going forward, the Central Bank Digital Currency (CBDC) will also pose a threat to deposit mobilisation. The circulation of India's e-Rupee has increased ten-fold, growing from Rs 103 crore in December 2023 to Rs 1,016 crore in September 2025, although its adoption remains limited. As the CBDC infrastructure develops and consumer acceptance rises, a significant portion of Casa could shift to e-Rupees held directly with the RBI, further diminishing banks' low-cost funding sources.

 

Banks with strong digital capabilities and good customer relationships have an edge over others. Effective payment apps that serve as primary accounts — used for most online payments — can help keep the Casa base. Banks with higher salary accounts enjoy an advantage over others as payroll deposits create anchor relationships that generate steady transaction flows. Also, those with a good customer base for credit cards can stop frequent outflow of money.

 

It's time for banks to move beyond Casa and appreciate that the future of low-cost funding lies in different products.

 

They could create more flexible recurring deposit options to compete with mutual fund SIPs, along with specialised deposit products aimed at specific customer groups.

 

Using call centres effectively to connect directly with high-value Casa accounts can help track fund movements and avoid deposit migration. Artificial intelligence and analytics can also assist banks to spot accounts that might move to other banks. In sum, they need to invest in strong digital payment systems to stay competitive in an increasingly mobile-first financial world.

 

Current challenges on the liabilities side are just not a cycle tied to interest rate changes. The rise in digital payments, shifts in the behaviour of household savings, changes in the government’s money-management policy, and emerging technologies like CBDC have created an irreversible structural shift in the deposit dynamics.

 

We have already seen the change in the left side of the balance sheet. Most banks are aggressively chasing retail loans, reducing their exposure to corporate loans. Now, they need to work on a strategy for the right side of the balance sheet. Interest rates are just one of the factors. Banks that engage customers better and provide high service quality will come out winners.  The writer is an author and senior advisor to Jana Small Finance Bank Ltd. His latest book: Roller Coaster: An Affair with Banking. To read his previous columns, log on to www.bankerstrust.in   X: @TamalBandyo