Household savings are moving to mutual funds from banks impacting their liquidity: RBI Governor

Households are choosing the capital markets over the banks to park or invest their savings, highlighted RBI Governor Shaktikant Das during his address at FE Modern BFSI (Banking, Financial Services, and Insurance) Summit 2024 on Friday.

Governor Das highlighted that traditionally, banks were the primary choice for households to invest their money. However, there has been a noticeable change in consumer behaviour, with a growing preference for capital markets and other financial intermediaries.

He noted, “Households and consumers who traditionally leaned on banks for parking or investing their savings are increasingly turning to the capital markets and other financial intermediaries.”

This trend indicates a broader diversification of household investments into mutual funds and other savings tools, moving away from traditional investment tools.

The Governor stated, “While bank deposits continue to remain dominant as a percentage of the financial assets owned by the households, their share has been declining, with households increasingly allocating their savings to Mutual Funds, Insurance Funds, and Pension Funds.”

Governor Das also pointed out that this shift in investment patterns has significant implications for the banking sector. Banks now need to explore alternative methods to bridge the gap between credit and deposits.

He added, “On their part, banks have sought to fill the credit-deposit gap by increasing their reliance on other sources like short-term borrowings and certificates of deposit, etc. This increases their sensitivity to interest rate movements and poses challenges to liquidity management.”

The Governor further elaborated on the implications of the shift from CASA (Current Account Saving Account) deposits, stressing that banks must remain vigilant and adaptive. He stated that banks need to continuously focus on improving and refining their credit underwriting standards and the pricing of risks to maintain stability and profitability.

Reflecting on recent global banking events, Governor Das drew attention to the banking crises in the US and Switzerland in 2023, which highlighted the risks and vulnerabilities inherent in certain business models. He emphasized the importance of learning from these crises to enhance the resilience of the banking sector.

“The banking crisis in the US and Switzerland in 2023 has again brought into focus the risks to banking stability from certain business models and their inherent vulnerability,” he added.