The lower growth in bank deposits vis-à-vis credit growth in recent period has prompted some to speculate that this is due to shift of household savings to equity-funds. In fact, there is no logic in the argument that mutual funds causing a fall in bank deposits growth. That can’t be true.
Even if money is moving from bank deposits to mutual funds, ultimately the money should remain in banks albeit under a different ownership. How would this cause a dip in bank deposits?
According to a Bank of Baroda study, an econometric analysis does not show a causal relation between bank deposits and mutual funds either ways. Data however shows that in the pre-covid period the elasticity of growth in deposits to growth in mutual funds was higher at 0.56 and came down to 0.35 in the post covid period. So clearly, there has been some displacement, the study said.
In fact, the ratio of AUM of mutual funds to bank deposits has been rising from FY14 onwards. However, it had plateaued around 21% before covid. Subsequently it has moved up sharply and peaked at 35% in FY24.
However, there is a strong relation between stock indices and AUM under mutual funds (assuming these indices represent both equity and debt market) which has heightened post FY20, the study said.
“In conclusion it is still not clear that there is a causal relationship statistically between growth in deposits and mutual funds. Being a more recent phenomenon, the long-term time series did not show significant trend for mutual funds in the past and hence this can be a reason for the absence of significant relations between the two. In terms of plain elasticities, there has been a lower number in the period starting FY20 when mutual funds gained in ascendency,” the BoB study said.
The lagging deposit growth below the credit growth has become a concern for banks prompting them to announce special schemes to mobilise more deposits. Recently, the government and the Reserve Bank of India too had asked banks to focus more on mobilizing household savings.