How to Manage Deposit Dynamics: Strategies for Indian Banks

How to Manage Deposit Dynamics: Strategies for Indian Banks

Indian banks today face a significant challenge: deposit growth is lagging behind the expansion of credit. This imbalance, as noted by Tamal Bandyopadhyay, is creating a ripple effect, leading to shrinking low-cost CASA inflows, escalating funding costs, and substantial structural shifts. You’ll learn to manage deposit dynamics in a financial ecosystem undergoing rapid transformation. This article delves into the core issues, exploring the causes behind these changes and providing insights into the strategic responses banks can adopt to thrive in this evolving environment. The dynamics of deposits, once stable, are now subject to the forces of fintech, policy, and shifting consumer preferences. Understanding these forces is crucial for the banking sector's future.

The Indian banking sector currently faces a complex interplay of challenges, including slowing deposit growth, escalating funding costs, and substantial structural shifts. These issues are primarily driven by the expanding influence of Unified Payments Interface (UPI), e-Kuber, and evolving digital savings trends. To gain a comprehensive understanding of the current state of Indian banks, it's essential to analyze the shifts in deposit dynamics and the strategic responses required to navigate this changing landscape.

The Tug-of-War: Credit Expansion vs. Deposit Growth

The balance sheets of Indian banks are currently witnessing a dynamic tug-of-war. The asset side, comprising loans and investments, is juxtaposed against the liabilities side, which includes deposits and capital. A critical observation is that credit growth has consistently outpaced deposit growth in the majority of recent financial periods. This divergence is a key indicator of the challenges banks face in securing low-cost funds.

Deposit Growth Slowdown: A Statistical Overview

As of October 17, the year-on-year deposit growth stood at 9.5 percent, a decrease from the 11.7 percent recorded a year earlier. Simultaneously, credit growth remained robust at 11.5 percent, mirroring the previous year's performance. In the current financial year, deposit growth has been recorded at 5.8 percent, a slight decrease from the 6.5 percent observed last year. Credit growth, at 5.3 percent, has also seen a marginal increase compared to the 4.9 percent in the prior year. These figures underscore the growing disparity between credit expansion and deposit accumulation.

The Diminishing CASA Inflows: A Cause for Concern

More significant than the growth rates themselves is the changing composition of deposits. A notable concern is the thinning flow of low-cost Current and Savings Accounts (CASA). This decline directly impacts banks by increasing the overall cost of deposits, thereby affecting their Net Interest Margin (NIM). The NIM, which reflects the difference between the interest earned on loans and the interest paid on deposits, is a crucial metric for profitability. The quality of loan assets and the NIM are the two key contributors to a bank's profit.

Factors Driving the Structural Shifts

Several factors contribute to these shifts, notably the growing financialization of savings. This transition from traditional bank deposits to alternative investment avenues, such as mutual funds and equities, is a significant trend. The banking system must understand how to adapt to this structural shift.

The Rise of Mutual Funds and Equity Investments

The assets under management (AUM) in the mutual fund industry have expanded at a significantly faster rate than bank deposits over the past decade. The ratio of mutual fund AUM to bank deposits has increased dramatically, rising from approximately 12 percent to about 32 percent. This growth is primarily fueled by the increasing popularity of Systematic Investment Plans (SIPs), which divert funds away from bank CASA accounts. Notably, some major mutual fund entities are managed by banks themselves.

Impact of Equity Market Performance

The rise in the value of equities has also played a role. The returns on equity investments often surpass those offered by bank deposits, incentivizing investors to allocate funds away from traditional savings. This shift has led banks to rely more on high-cost bulk deposits and certificates of deposit (CDs), which replace the low-cost CASA deposits. Corporate entities are also opting to keep surplus cash in liquid funds, attracted by higher returns and lower risk profiles compared to bank accounts.

Impact of Policy and Technological Changes

Policy changes and technological advancements are significantly altering the dynamics of deposit mobilization. The Reserve Bank of India's (RBI) monetary policy adjustments and the emergence of new platforms like e-Kuber are reshaping the financial landscape. Furthermore, the rise of digital payments and the introduction of Central Bank Digital Currency (CBDC) are poised to create further structural shifts.

RBI's Monetary Policy and Lending Rates

Since February, the RBI has reduced the policy rate by a full percentage point to 5.5 percent, leading to a decrease in lending rates. However, the cost of deposits for most banks remains elevated. The weighted average rate on new rupee term deposits rose by 4 basis points (bps) month-on-month in September, marking the first such increase since the RBI began its rate-cutting cycle. In contrast, the weighted average lending rate on new rupee loans stood at 8.50 percent in September 2025, a decrease of 24 bps from the previous month. The lending rates of banks have fallen 90 bps since February. This scenario represents an 'adverse margin environment,' intensifying the competition for deposits.

The Influence of UPI and e-Kuber

The rapid growth of UPI has significantly altered deposit retention dynamics. The surge in digital transactions has reduced the average time money stays in bank accounts. The e-Kuber platform, which centralizes government payments, has also fundamentally changed government fund movement through the banking system. The introduction of Just-In-Time fund management principles and the Single Nodal Account system has led to government funds being kept in zero-interest accounts for shorter durations, thus reducing a key source of low-cost deposits for banks.

Strategic Responses for Banks

To navigate these challenges, banks must adopt strategic measures focusing on customer engagement, product innovation, and technological advancement. These strategies will be crucial for maintaining competitiveness and ensuring long-term sustainability.

Customer Engagement and Product Innovation

Banks should prioritize customer engagement by providing high-quality service and developing innovative deposit products. Creating flexible recurring deposit options can help compete with mutual fund SIPs, while specialized deposit products can cater to specific customer groups. Effective use of call centers to engage with high-value CASA accounts can assist in monitoring fund movements and preventing deposit migration.

Leveraging Technology and Data Analytics

Artificial intelligence and data analytics can play a vital role in identifying accounts that may move to other banks. Investing in robust digital payment systems is essential to remain competitive in an increasingly mobile-first financial world. Banks that can effectively leverage technology to understand customer behavior and preferences will be better positioned to attract and retain deposits.

Charting the Future Landscape

The challenges in the liabilities side are not merely cyclical but represent an irreversible structural shift. Banks must adapt to the rise in digital payments, changing household savings behavior, and emerging technologies like CBDC. The future of low-cost funding lies in embracing new strategies. Banks that focus on customer engagement and provide high-quality service will be the winners in this evolving financial landscape. Banks must adapt to the evolving financial landscape by taking steps to manage deposit dynamics.

Factor	Description	Impact on Banks
Slowing Deposit Growth	Credit growth outpaces deposit growth.	Increased funding costs, pressure on Net Interest Margin (NIM).
Thinning CASA Inflows	Decline in low-cost Current and Savings Accounts.	Higher cost of deposits, reduced profitability.
Financialization of Savings	Shift to mutual funds, equities, and liquid funds.	Reduced CASA, increased reliance on high-cost deposits.
UPI and Digital Payments	Rapid growth in digital transactions.	Shorter fund retention periods, reduced CASA balances.
e-Kuber and Government Policies	Centralized government payments and Just-In-Time fund management.	Reduced government deposits, decreased low-cost funding.
CBDC	Potential shift of CASA to e-Rupees.	Further reduction in low-cost funding sources.