Recent remarks by the RBI Governor have raised concerns about a growing trend: consumers are increasingly moving away from traditional bank fixed deposits (FDs) in favour of alternative financial instruments such as mutual funds. This shift, as noted by the central bank, could pose significant challenges to the banking sector’s asset-liability management strategies. While cyclical factors may explain the slower growth in credit compared to FDs, the real concern is more systemic. The move away from FDs reflects a consumer-driven shift in financial behaviour.

The rise of mutual funds and the attractiveness of stock market returns have significantly influenced this shift. But what happens if stock market valuations dip? Will consumers revert to traditional assets like FDs, or will they continue to seek out new, perhaps riskier, investment avenues?

The potential for further oscillation in consumer behaviour is evident, especially as younger demographics, which constitute nearly two-thirds of India’s population under the age of 35, begin to explore emerging forms of investment. Cryptocurrencies and digital assets, despite existing in a legal grey area, have already seen increased trading volumes in India. This reflects a broader trend: money flows where resistance is minimal, and in the digital age, new forms of assets are increasingly appealing to a tech-savvy generation.

Unlike previous generations, today’s youth are driven by a “live in the moment” philosophy, where the pursuit of experiences often outweighs the traditional accumulation of wealth. This shift is not merely about seeking higher returns but also about aligning investments with personal values and lifestyles. This mindset fuels their willingness to explore diverse, sometimes volatile, asset classes like cryptocurrencies and digital assets.

Banks must gear up

The banking sector must prepare for this evolving landscape. Digital entities could potentially evolve into standalone or digital banks, appealing to younger Indians and creating new competition. As the RBI considers issuing new banking licences, the question arises: will current banks be able to compete with these emerging players, or will new champions emerge? For banks, the pressing question is whether they are ready to adapt to a scenario where deeper Indian bond markets reduce their reliance on government and blue-chip corporate business. In many developed economies, banks have successfully transitioned to lending more to retail, MSMEs, and SMEs. Indian banks must now consider whether they can do the same.

Political support is essential to ensure that banks are not hindered by populist measures like loan write-offs or freebies in sectors like agriculture or MSMEs.

The rise of digital assets, fintech solutions, and alternative investments demands that banks rethink their traditional models.

The writer is a policy researcher and corporate advisor