Indian Banks Face Threat as Savers Shift to Dalal Street Investments

Indian banks are facing a significant challenge as urban savers increasingly turn towards higher-yielding Dalal Street instruments like mutual funds and direct stock ownership. This shift threatens the traditional strength of banks in accessing low-cost current and savings account (CASA) deposits.

The democratization of technology and growing familiarity with Dalal Street among rural savers are fundamentally altering the landscape of financial savings. This trend is detrimental to high-street banks, intensifying the struggle for deposits.

Recent data reveals a decline in CASA ratios across commercial banks. The system-level CASA ratio dropped from 45.2% in March 2022 to 40.5% in September 2023. Factors contributing to this decline include rising bank fixed deposit rates.

The State Bank of India (SBI) witnessed a significant drop in its CASA ratio, falling by 330 basis points year-on-year to 41.18% as of December 31, 2023. P R Rajagopal, executive director of Bank of India, attributes this shift to the availability of alternative savings products due to digitization.

Data from the Association of Mutual Funds in India (AMFI) indicates a surge in inflows into equity mutual funds, reaching a 22-month high of ₹21,781 crore in January 2024. Additionally, the total number of SIP accounts increased to 79.20 million, reflecting the growing popularity of mutual fund investments.

Private sector banks are particularly affected by the decline in CASA, highlighting the urgency for banks to adapt to changing consumer preferences and technological advancements in order to remain competitive in the evolving financial landscape.