In such a situation, there is a danger of borrowing becoming expensive in the country, which may also curb our economic activities and growth.
There was a time when bank deposits were the only major option before people park their savings. People deposit their savings in current accounts, savings accounts, term deposit accounts and recurring accounts. Since most banks were government-owned, the safety of their deposits was unquestionable.
People’s involvement in the stock market was also low. Inflation was high in those days, and banks generally used to offer higher interest rates on deposits. Generally, term deposits used to double within six to seven years. In 1971, bank deposits, including savings, current, and term deposits, totaled approximately rupees 5,000 crore. By 2011, they had reached rupees 64 lakh crore. That is, an annual growth of 19.6 percent. However, for the past decade and a half, bank deposit growth has generally stalled, with total deposits reaching only rupees 268 lakh crore by March 2026. This means that the total annual growth in bank deposits between 2011 and 2026 has shrunk to a mere 10 percent. If we see credit growth, it was around 20 percent between 1971 and 2011, and it continued to be around 20 percent between 2011 and 2026 as well, but the growth in bank deposits has come down to merely 10 percent in the last one snd a half decade. During the financial year 2025-26, annual deposits grew by 13.5 percent, while credit growth was 16.1 percent. Consequently, banks have been facing difficulty in raising funds for lending, forcing them to borrow at higher market rates. In such a situation, there is a danger of borrowing becoming expensive in the country, which may also curb our economic activities and growth.
SHIFT FROM DEPOSITS TO MUTUAL FUNDS
It’s worth noting that savings patterns of Indian households has undergone major changes over the past few years. For example, households have now been borrowing in big way from banks and other financial institutions to build assets and repaying their debt through equally monthly installments (EMIs). This borrowing includes home loans, car loans, or other durable consumer goods. These EMI payments are essentially savings, but are not reflected in bank deposits and are instead recorded as repayments (which include repayment of principal and interest). Furthermore, over the past few years, people have also begun investing in mutual funds, as the find them more profitable than bank deposits. While people are saving, a significant portion of their savings are flowing into the stock market rather than banks.
While there’s no official data on total household investment in mutual funds, we can get a better idea using assets under management (AUM) growth and households’ share of the funds. Around 2011-12, household investments in mutual funds were around rupees 7-8 lakh crore, which increased to around rupees 74 lakh crore by 2025-26. This means total assets increased by approximately rupees 65 lakh crore.
Initially, mutual fund assets were dominated by institutions, but by 2026, significant share was held by households, especially through systematic investment plan (SIPs). According to SEBI estimates, households’ share in mutual fund investments increased from just 0.9 percent in 2011-12 to 6 percent in 2022-23. Today, households’ share of AUM has increased to over 50 percent. According to rough estimates, households have invested approximately between rupees 30 and 40 lakh crore between 2011 and 2026. This also points to a significant financialization of household savings, this time through the stock market.
The slowdown in deposit growth is not just a matter of statistics; it directly impacts the availability of credit in the economy. With this banks’ ability to lend gets reduced, which could lead to lower growth. We need to understand that banks are financial intermediaries that mobilize deposits and lend. Therefore, to increase the flow of credit (i.e., both for investment lending, for businesses for the construction of fixed productive assets and working capital, and for housing and durable consumer goods for households for), the prerequisite is that banks have sufficient funds. However, if households’ savings go into mutual funds, it develops the capital market, benefiting large corporations, but may exclude small borrowers who cannot easily access the market for funds. Over time, this can stifle credit growth, especially for sectors like micro, small and medium-sized enterprises (MSMEs) and agriculture, which rely heavily on bank lending rather than tapping capital markets. Placing savings in mutual funds hinders the growth of bank deposits and the flow of credit into the system, thus impacting overall economic growth.
GOVERNMENT’S ROLE
In recent years, the government launched the Pradhan Mantri Jan Dhan Yojana (PMJDY) to promote financial inclusion. This has allowed 58 crore people, to enjoy banking facilities, who were previously unbanked. Through these accounts, approximately rupees 3 lakh crore has so far been deposited in banks.
The safety of deposits in public sector banks has maintained people’s trust in these institutions. Furthermore, to protect depositors in private sector banks, the deposit insurance cover was increased to rupees 5 lakh, providing a safety net to depositors. While government efforts have boosted banking, it is interesting to note that in recent years, the government has also been encouraging investment in mutual funds by providing tax exemptions for the new pension scheme. The old pension scheme, which required pension funds to invest in either government bonds or bank deposits, was abolished in 2004. The boom in the stock markets, driven by large investments from institutional investors, has also boosted investment in mutual funds. The share of retail investors in the domestic capital market has seen a significant increase, as evident from the rapid growth in the number of unique registered investors on the National Stock Exchange. As on January 2026, the National Stock Exchange of India had 12.7 crore unique registered investors. Though, generally banks do not welcome very long term deposits, to reduce risk of lower interest in future, government can encourage people by way of tax incentives, to deposits, especially for long term. Instead of blanket tax incentives, a more targeted tax incentives can be given for long-term deposits (5–10 years), especially development linked deposits for MSME, agriculture and exports. Secondly, banks can introduce more innovative deposit products such as Education-linked deposits (goal-based, with step-up contributions), Pensionoriented deposits with annuity conversion options, Insurance-linked deposits (deposit + life/health cover bundle) and also Inflationprotected deposits (to counter real return erosion). Thirdly, despite the fact that deposits are safe, but post tax real returns are often low or even negative. Government can introduce indexation benefits for long term deposits, allowing senior citizens to deposit more in senior citizen deposits, incentivizing middle class to make more deposits in banks. Government can think of issuing deposits with indexation benefits for long term deposits to ensure reasonable real rate of return. It is high time that the government addressed the issue of slowing deposit growth to keep India’s economic trajectory on the right path.
