Banking on tradition: Why Indian banks must innovate to survive

At least thrice in the recent past, Reserve Bank of India (RBI) Governor Shaktikanta Das publicly voiced the institutional concern that consumers are moving away from bank fixed deposits, or FDs. Instead, competing investment instruments such as mutual funds have grown in popularity among Indians, potentially hurting the banking sector’s asset-liability management.

Recent news reports that bank deposits have overtaken credit disbursement as of July 26, 2024, seem to be a sectoral attempt to allay these worries. However, the RBI’s outlook on the consumer trend of divesting their investments away from bank FDs is more structural in nature, while credit growth slowing as compared to deposit growth is only cyclical.

That’s where the sector’s lobbying efforts should slow down. The regulator has sounded the bugle for a structural concern that is beyond anyone’s control except for the consumers themselves. The lesson here is that diversifying the financial basket with multiple asset classes is good for consumers.

Indian banks have long reaped the benefits of a shallow debt market, where limited competition has allowed them to dominate various consumer segments with minimal innovation. Even competitors like non-banking financial companies (NBFCs )and fintech companies, which operate in consumer lending and other financial services, often borrow from traditional banks to finance their own onward lending activities.