RBI Urges Commercial Banks to Rebuild Deposit Franchises as Households Shift Savings to Equities — November 4, 2026

The Reserve Bank of India (RBI) has issued a fresh warning to commercial lenders, urging them to reinforce their retail deposit franchises to support sustainable credit expansion amid a structural shift in how Indian households allocate their wealth.

Addressing the leadership conference of Indian Bank in Chennai, RBI Deputy Governor Swaminathan J highlighted that evolving customer preferences and an expanding array of financial products are fundamentally altering the deposit mobilisation landscape.

Widening Ecosystem Pressures Liability Franchises

The central bank emphasized that commercial banks are no longer competing solely among themselves for retail liquidity. Instead, they operate inside an expansive, fast-moving financial ecosystem featuring mutual funds, fintech platforms, insurance providers, and capital market intermediaries.

"Banks now operate within a wider ecosystem of financial institutions, fintech companies, technology platforms and other service providers," Swaminathan remarked. “These developments call for renewed attention to business models, customer relationships and the strength of the deposit franchise.”

The warning comes at a critical juncture for the Indian banking sector. For several consecutive quarters, credit demand has outstripped deposit mobilisation across commercial lenders. To plug the funding gap, several banks have turned to wholesale deposits, certificates of deposit (CDs), and short-term market borrowings. The RBI has repeatedly cautioned that over-reliance on short-term wholesale funds heightens sensitivity to interest rate fluctuations and introduces structural liquidity vulnerabilities into balance sheets.

The Ongoing Financialisation of Household Savings

Historically, low-cost Current Account and Savings Account (CASA) balances formed the bedrock of Indian banking liabilities. However, the broader financialisation of domestic savings has seen retail investors channel unprecedented sums into mutual fund systematic investment plans (SIPs), direct equity trading, and pension vehicles.

Recent central bank data underscores this migration:

• Slipping Deposit Dominance: While bank deposits continue to account for the largest single share of household gross financial assets, their overall proportion in net household financial savings has recorded a persistent decline over recent financial years.
• Shift to Term Deposits: Within banking liabilities, depositors are steadily rotating out of low-yield savings bank accounts—where major institutions offer as low as 2.5% to 3% interest—into higher-yielding term deposits to lock in returns.
• Capital Market Inflows: Inflows into domestic equity mutual funds and retail market participation have consistently reached record highs, making equities a direct rival to traditional fixed deposits.

Calls for Tax Parity on Deposits Gain Ground

The migration of domestic savings away from commercial banks has prompted industry participants and economic think tanks to advocate for fiscal adjustments.

A recent report by SBI Research highlighted that without tax reforms, retail incentives will continue to heavily tilt toward equities over banking products. SBI Research proposed:

• Higher Savings Thresholds: Doubling the tax exemption limit under Section 80TTA on interest earned from savings bank accounts to ₹20,000 from the existing ₹10,000, which carries an estimated annual revenue impact of around ₹1,531 crore.
• Concessional FD Taxation: Introducing a flat 15% tax rate on bank term deposits to establish parity with capital gains tax regimes applied to market-linked financial products.

Market and Investment Outlook

For domestic equity markets, the retail pivot toward capital markets has served as an anchor of liquidity, insulating Indian benchmark indices from volatile foreign institutional investor (FII) flows. However, for the banking pack, the scramble to defend deposit market share presents a challenging balancing act.

If lenders are compelled to aggressively hike deposit rates to protect their funding bases, their cost of funds will climb, limiting room for net interest margin (NIM) expansion. Conversely, slowing credit delivery to match muted deposit growth risks dampening asset growth projections. For conservative savers, the central bank’s firm guidance ensures that banks will have to work harder—and potentially price deposits more attractively—to retain retail capital in the quarters ahead.