The Changing Landscape of Savings in India
India has witnessed a significant transformation in the way people save and invest their money. In the past, bank deposits were the primary avenue for individuals to park their savings. People typically deposited their money in current accounts, savings accounts, term deposit accounts, and recurring accounts. Given that most banks were government-owned, the safety of these deposits was largely unquestioned.
During those times, the stock market had limited appeal for the general public. High inflation was a common challenge, and banks often offered attractive interest rates on deposits. Term deposits, for instance, could double within six to seven years. In 1971, total bank deposits, including savings, current, and term deposits, amounted to approximately rupees 5,000 crore. By 2011, this figure had grown to rupees 64 lakh crore, reflecting an annual growth rate of 19.6 percent. However, over the past decade and a half, the growth of bank deposits has slowed down significantly. By March 2026, total deposits reached only rupees 268 lakh crore, with an annual growth rate of just 10 percent. This decline is concerning as it affects the availability of credit in the economy.
Shift from Deposits to Mutual Funds
One of the key reasons behind the slowdown in deposit growth is the shift in savings patterns among Indian households. Over the years, people have increasingly turned to alternative investment avenues such as mutual funds, which are perceived as more profitable than traditional bank deposits.
Households are now borrowing heavily from banks and other financial institutions to build assets, with repayments made through monthly installments (EMIs). These EMI payments, while essentially a form of savings, are not reflected in bank deposits but are instead recorded as repayments of principal and interest. Additionally, investments in mutual funds have surged, with household investments growing from around rupees 7-8 lakh crore in 2011-12 to approximately rupees 74 lakh crore by 2025-26. This represents a massive increase of about rupees 65 lakh crore.
Initially, mutual fund assets were dominated by institutional investors, but over time, a significant portion has been held by households, especially through systematic investment plans (SIPs). According to SEBI estimates, the share of households in mutual fund investments increased from 0.9 percent in 2011-12 to 6 percent in 2022-23. Today, households account for over 50 percent of the total assets under management (AUM) in mutual funds. This trend highlights a growing financialization of household savings, with a greater emphasis on the stock market.
Impact on Credit Availability
The slowdown in deposit growth has direct implications for the availability of credit in the economy. Banks rely on deposits to fund their lending activities, and a reduction in deposits can limit their ability to extend credit. This, in turn, can hinder economic growth. While mutual funds contribute to the development of the capital market and benefit large corporations, they may exclude small borrowers who depend on bank lending for their operations.
Sectors such as micro, small, and medium-sized enterprises (MSMEs) and agriculture, which heavily rely on bank credit, may face challenges if savings continue to flow into mutual funds. This shift could stifle credit growth and impact overall economic development.
Government Initiatives and Future Measures
To address these challenges, the government has taken several steps to promote financial inclusion. The Pradhan Mantri Jan Dhan Yojana (PMJDY) has enabled 58 crore people to access banking facilities, with approximately rupees 3 lakh crore deposited in banks so far. The safety of deposits in public sector banks has also helped maintain trust in these institutions. Furthermore, the deposit insurance cover for private sector banks has been increased to rupees 5 lakh, providing a safety net for depositors.
In addition, the government has encouraged investment in mutual funds by offering tax exemptions for new pension schemes. The abolition of the old pension scheme, which required pension funds to invest in government bonds or bank deposits, has further contributed to the growth of mutual funds. Institutional investments in the stock market have also played a significant role in boosting mutual fund inflows.
Recommendations for Encouraging Deposits
To reverse the trend of declining deposit growth, the government can consider several measures:
- Targeted Tax Incentives: Instead of blanket tax incentives, targeted incentives for long-term deposits (5-10 years) can encourage people to save in banks. Special deposits linked to development goals, such as MSMEs, agriculture, and exports, can be promoted.
- Innovative Deposit Products: Banks can introduce innovative deposit products such as education-linked deposits, pension-oriented deposits, insurance-linked deposits, and inflation-protected deposits. These products can cater to specific needs and provide better returns.
- Indexation Benefits: To counter the erosion of real returns due to inflation, the government can introduce indexation benefits for long-term deposits. This would make bank deposits more attractive, especially for senior citizens and the middle class.
It is crucial for the government to address the issue of slowing deposit growth to ensure that India's economic trajectory remains on track. By promoting a balanced approach between savings and investments, the country can foster sustainable economic growth.
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