India’s banking story has been dominated by one phrase: bad loans.The years following the corporate lending boom left banks grappling with mountains of stressed assets.
Billions of rupees were written off, promoters were dragged to bankruptcy courts, and taxpayers watched public sector banks receive repeated capital infusions.That chapter is largely behind us.Today, Indian banks are healthier than they have been in years. Gross non-performing assets are at multi-year lows, profits are at record highs and capital buffers are comfortable.
Yet, beneath these encouraging numbers, another challenge is quietly gathering momentum.Banks are running short of deposits.It may not sound as dramatic as a bad loan crisis, but the consequences could be just as significant for borrowers, savers and bank shareholders.The problem is straightforward. Credit demand has, for much of the past two years, grown faster than deposits.
Every loan a bank gives has to be funded by deposits or other borrowings. When deposits fail to keep pace, banks have little choice but to compete harder for customers’ savings.That competition is already visible. Banks are rolling out special fixed deposit schemes, offering higher interest rates and increasingly relying on bulk deposits to bridge the gap.
These measures help in the short term but also raise the cost of funds.And when funding becomes more expensive, banks’ profitability comes under pressure.Several lenders have already indicated that net interest margins—the difference between what banks earn on loans and what they pay on deposits—are likely to remain under pressure in the coming quarters.
Even if credit growth stays healthy, earnings growth may not be as easy as it was over the last few years.The changing behaviour of Indian households is another reason deposits are not flowing into banks as they once did.For decades, bank deposits were the default destination for savings. Today, households have far more options.
Mutual funds, equities, insurance products, gold, real estate and even government-backed small savings schemes are competing for the same pool of money. Many younger investors are willing to accept greater risk in pursuit of higher returns.Banks are discovering that attracting deposits is no longer a passive exercise. It has become a full-fledged competitive business.This also changes the conversation around interest rates.
When the Reserve Bank of India cuts policy rates, borrowers naturally expect cheaper loans. But if banks are struggling to mobilise deposits, they may not be able to pass on the entire benefit. Funding costs matter as much as policy rates.The implications extend beyond bank balance sheets.Higher deposit rates are good news for savers.
They are less welcome for borrowers, who may not enjoy sharp reductions in lending rates. Investors, meanwhile, will need to pay closer attention to banks’ ability to grow low-cost deposits rather than focusing only on loan growth.In the years after the bad loan clean-up, the market rewarded banks for improving asset quality.
The next phase of competition could be decided by something far less glamorous: who can attract and retain deposits at the lowest possible cost.India’s banking system has solved one of its biggest problems. It now faces another.This time, the battle is not over bad loans.It is over the savings of ordinary Indians.
