R. Suryamurthy
The landscape of personal finance in India is undergoing a transformation, with banks, mutual funds, and small savings schemes fiercely vying for the nation’s savings. A recent report by Bank of Baroda sheds light on the dynamics of this competition in FY25, revealing how changing investment preferences and market forces are shaping the flow of funds.
While banks remain a cornerstone of India’s financial system, they faced headwinds in attracting deposits during FY25. Overall, deposits grew by 10.3% in FY25. This growth, though positive, was overshadowed by the stronger 11% growth in credit.
Several factors contributed to the challenges banks faced. Firstly, despite offering higher deposit rates (with the weighted average term deposit rate of banks moving from 6.44% in Feb 2024 to 6.57% in December 2024 before receding to 6.48% in February) , they encountered obstacles, particularly in the first quarter, due to subdued government spending which generally fuels the economy and increases the flow of money in the market. Secondly, the booming capital markets presented a compelling alternative for investors, leading to some shift of funds away from traditional bank deposits. Banks had to keep deposit rates elevated to stay competitive, highlighting the increased pressure in the savings market.
Mutual funds have emerged as a significant force in attracting savings, offering investors the potential for higher returns compared to conventional bank deposits. The report highlights a substantial increase of Rs 12.34 lakh crore in the Assets Under Management (AUM) of mutual funds in FY25. This figure underscores the growing popularity of mutual funds as an investment vehicle.
To put this in perspective, the increase in mutual fund AUM, while significant, was still less than the increase in bank deposits which stood at Rs 21.0 lakh crore. However, the ratio of incremental AUM to incremental deposits shows an interesting trend. There was a marginal increase in this ratio from 57.5% in FY24 to 58.7% in FY25, indicating that mutual funds are capturing a slightly larger share of the incremental savings in the economy. The volatility of the stock market, especially following the USA Presidential Election results, has influenced investor sentiment, but mutual funds continue to attract a significant portion of savings.
Small savings schemes, traditionally popular among rural households and lower-income groups, continue to play a role in the savings landscape. As of December 2024, outstanding small savings represented 9% of total bank deposits, a figure consistent with previous years (9.1% in March 2024 and 9% in March 2023). This suggests that while small savings schemes provide a stable savings avenue, they haven’t witnessed a dramatic shift in market share compared to banks.
Interestingly, FY24 saw a sharp 14% growth in small savings, coinciding with a 14.2% growth in deposits and certificates. However, the growth in small savings has slowed down on a year-to-date basis in FY25, reaching 6.3% compared to 9.3% in the same period last year. While there’s an anticipated uptick in investments during the fourth quarter as individuals seek tax benefits, the overall growth rate for the year is expected to be lower than the previous year.
The analysis of fund flows in FY25 reveals a dynamic interplay between different savings avenues. The competition for deposits is intensifying, with mutual funds posing a significant challenge to banks. While small savings schemes retain their niche appeal, their growth trajectory suggests a steady, rather than explosive, expansion.
Looking ahead, the report suggests that the declining interest rate regime expected in FY26 will further shape the competition for deposits. Banks will need to innovate and offer competitive products to retain and attract depositors. The continued growth and evolution of the mutual funds industry will also be a key factor to watch.