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Mutual funds versus bank deposits:

Let's dispel myths

T he deposits and advances of the Indian banking we see net inflows of Rs. 22 trillion from 2013-14 till end-

system are likely to record a significant uptick in
January of 2023-24, the equivalent of about 41% of the
2023-24. Bank deposits are likely to end this fiscal
year with 13-14% growth. However, credit growth incremental current-and-savings-account (CASA) deposits
that banks got in the same period. The AUM of MFs
will outpace this and could end the year with 19-20% growth. increased by Rs. 45.7 trillion from 2013-14 to 2023-24
Even if we net out the merger impact of HDFC, the story (combined effect of inflows and increased asset values),
does not change materially. This is a structural break, as while deposits of the banking system increased by around
nominal GDP growth is likely to end 2023-24 below 10%, so Rs. 137 trillion (likewise). So, the AUM of MFs expanded by
credit as a multiple of nominal GDP growth will be about around a third of bank deposit value. This indicates that flows
2.3 times, against a 7-decade average of close to 1.5. Even into MFs came from deposits in the banking system;
if the ratio moderates to about 1.5 over the medium term, otherwise, deposit growth would have slumped and banks
we will still have a short-term credit spurt. Against this could have faced asset-liability mismatches.
backdrop, it is imperative to understand where bank deposit
growth is headed. How do we explain this link?: When a customer buys MFs,
the money mostly flows from the person's savings account
First, let's address a misplaced narrative: that the
to the current accounts of MF distributors (and vice versa).
financialization of savings, particularly by way of mutual
Thus, it is debited from the customer's account but stays in
funds (MFs), has been crowding out incremental growth in the banking system. Even upon the redemption of MF units,
bank deposits. As per depositories data, around 120 million
the money flows into the customer's account from the
new demat accounts were opened from 2014 to 2023. As
company's accounts. Thus, deposits shift from savings into
per National Stock Exchange data, about 85 million unique current accounts when a retail investor invests, and the
investors (55 million added in the last four years) from about
other way round when the investor redeems the investment.
17% of Indian households are directly investing in the Indian
stock market, mostly through public issues.
Thus, a decline in bank deposits is MF-agnostic.

The MF industry has Rs. 52.7 trillion worth of assets under
This is borne out by other data. If we look at incremental
management (AUM) as of end January, and 150 million
deposits in savings accounts, their share in total deposits has
investor folios. On an average, over 1.2 million new folios
reduced to 20% in 2022-23 from 40% in 2019-20, while
have been added every month since April 2017. It is
expected that the MF industry's AUM will cross Rs. 100 incremental current account deposits in total deposits have
increased to 10% in 2022-23 from 8% in 2019-20. The overall
trillion in the next nine or 10 years. This, however, does not
necessarily mean a decline in bank-deposit growth, as some CASA proportion, however, has declined from 45.2% in
financial analysts have argued. 2021-22 to 40.5% in 2023-24. The reason for this sharp
recent decline is that deposits in savings bank accounts have
Firstly, if we look at the MF industry's net inflows/outflows, flowed into time deposits, with banks having raised their

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