Deposit Roulette

“Free enterprise provides you the

freedom to gamble and freedom

to lose. The great thing here is you

don’t even have to play to lose.”

— Barbara Ehrenreich

Rewind Thousands of Years: If the Gurus of yore had imparted on their royal shishyas crafts and capabilities that may or may not work in real life, these saintly teachers would have risked running out of business. They would also have been completely missed in today’s holy and history books.

Fast-forward to Today: It is irony personified that savings accounts deposits in banks, placed there for the primary purpose of safety, are being slyly invested by bankers in high-risk instruments like mutual funds and stocks. Expertise and financial science aside, it is a tantamount to a gamble.

In the corridors of Indian banking, a quiet transformation is underway. Banks, traditionally seen as custodians of small household savings, are turning into aggressive investors. Using funds that small depositors entrust to them for safekeeping, India’s largest banks are betting on mutual funds (MFs), some of which invest in volatile debt or equity markets. With just 2.5 per cent interest on savings accounts and 6-7 per cent on fixed deposits (FDs), banks have access to the cheapest pools of capital in the financial system. That money is now being deployed – not into direct lending or development – but into risky market instruments.

Call it ‘financial adventurism’ or ‘legalized speculation with public funds’. With the Reserve Bank of India slashing repo rates last week, lending margins of banks are shrinking sharply; this has led bankers to chase quick gains, gambling with funds entrusted to them by small depositors. In a nation where 80 per cent of households still prefer to park their money in traditional bank accounts and not stock market plays, this is sleight-of-hand, deceptive… It is also dangerous.

MFs: New, Fee‑Rich Alternatives

In the last year alone, overall investments in mutual funds have skyrocketed 91 per cent, fuelled by surplus cash and subdued credit offtake. Leading this rush are corporate bond funds, which hit two‑year highs recently after the RBI tweaked repo rates and released a torrent of liquidity. In sheer numbers, banks’ MF investments had already skyrocketed to Rs 1.19 lakh crore in March 2025, from Rs 62,499 crore just a year earlier, according to ICRA Analytics.

The larger picture is stark – MF assets under management (AUM) grew by 22.25 per cent YoY in March 2025 to Rs 70 lakh crore. The highest growth was in open-ended ‘other schemes’ (23.80 per cent), followed by open-ended ‘equity schemes’ (23.57 per cent) and hybrid schemes (20.74 per cent). ‘Other Schemes’ comprise index funds, ETFs and overseas investments, according to the Association of Mutual Funds in India. In Index Funds and ETFs, gold schemes grew 87.33 per cent to Rs 61,422 crore, followed by a 31-per cent growth in index funds to Rs 2,92,206 crore.

This shift is driven by sub-optimal credit growth, surplus liquidity and favourable markets. Banks are inclined to utilize liquid and money market schemes for higher short-term returns, rather than direct lending. In turn, MFs have found a perfect ally in banks. As rising redemptions amid global volatility have left MFs under severe strain, the focus has shifted to banks. After all, a single bank investment outweighs thousands of small, individual deposits. Thus, asset managers incentivize distribution through banks, offering hefty commissions. In the process, your bank has turned into a hard-nosed business – looking for quicker, higher profits. If there’s a gamble involved, so be it.

Cheap Deposits, Margin Pressures

Paradoxically, it is low deposit interest rates that are driving speculative bank behaviour. Scheduled commercial banks hold Rs 190 lakh crore in aggregate deposits, as per RBI data of March 2025, of which 50 per cent comes from household savings and term deposits. Further, private banks pay a pittance as interest on savings accounts, giving them dirt-cheap access to funds. Last week’s repo rate cut of 50 basis points to 5.5 per cent has sent FD rates even lower – top private banks have already trimmed payout rates by 25 basis points.

With low-cost funds and slow credit demand from consumers and corporates, banks are flush with liquidity. The tell-all is that rather than clearing pending loan applications and financing MSMEs and infrastructure projects, banks are ploughing funds into MFs, both in-house and third-party.

Historically, banks have accepted deposits to lend to creditworthy borrowers. But banks now seem to be chasing ‘fee income’ by offering lavish commissions, often lowering scrutiny and oversight. It is a vicious circle in the life of a bank – lending growth falters, RBI lowers repo rates, deposit rates firm up, mutual‑fund allocations rise, funds are diverted from retail savings… It is a de‑facto financial roulette, with banks and fund houses engineering a merry‑go‑round that rewards their own, while depositor funds are risked and public confidence eroded. Within banks, the pressure to push funds is extreme, given the rewards – the skew is so heavy that relationship managers are pushed to ‘sell’ MFs aggressively, with internal targets and KPIs at stake.

Blissful, Unaware Consumers

Over 70 per cent of bank account-holders remain unaware that their bank invests in mutual funds using their deposit money, a Securities and Exchange Board of India (SEBI) survey has revealed. The illusion of security is maintained staunchly, even as funds get channelled into risky financial instruments that could suffer from market volatility, credit downgrades or redemption pressures. This is true not just in India, but holds good for all of the connected, digitized world.

Look at the 2008 global financial crisis, which stemmed from just such behaviour by banks in the United States. Financial institutions cleverly repackaged mortgage products to sell them as ‘safe’ instruments. The US authorities retaliated with crisis regulations, but banks were smarter – they stayed profitable by creating new earnings heads like ‘Fee-Income’ and ‘Product Distribution’.

All of 17 years since that crisis, globalization and bank mergers-buyouts later, Indian banks have imbibed the tricks and nuances. They have also imbibed risks like market shocks, redemption runs and regulatory gaps – some of which were inherent triggers for the NPA crisis of 2015-2019, which saw bank NPAs soar to Rs 10 lakh crore. Since then, banks have been reluctant to lend aggressively to anyone, especially large companies and MSMEs. Instead, they are adopting the cleaner route called “the financial market”. But all this does is swap credit risk for market risk, which is even worse – any liquidity event, redemption or default can trigger large scale retail customer panic.

Hairy Situation, From Any Angle

The situation is hairy, especially in a developing and largely ignorant market. For one, India has 60 crore account-holders under Jan Dhan Yojana and other savings programs, a majority of them first-timers in banking and unaware of risk-weighted instruments. They are equally unaware that their Rs 5,000 deposit is being used to fund bond markets or achieve MF distributor targets.

Global precedents are aplenty. In 2011 in the US, MF Global used customer funds to play sovereign bonds. It lost US $1.6 billion (Rs 15,000 crore) and its CEO Jon Corzine faced a Congressional grilling. The K1 Fund Collapse in Europe in 2008 left customers exposed to unregulated hedge fund products, leading to heavy losses. Credit Suisse’s exposure to Archegos and Greensill in 2021-23 led to billions in losses and its acquisition by UBS.

In India, Franklin Templeton shut down six debt schemes in 2020, impacting lakhs of investors, including retired pensioners. And while not mutual-fund related, the Punjab and Maharashtra Cooperative Bank collapse in 2019 underscored how mismanagement of depositor funds without disclosure can lead to bank collapse(s).

What is unfolding is not a scam; it is worse, for it involves a quiet repurposing of public trust. With disclosures kept obscure, banks are turning into investment houses and speculating with depositor funds. Starkly, they are not lending to farmers or start-ups – moves that would promote economic growth. They are focussing on commissions, speculative risks and raw profits, all but legalized financial alchemy. Caught dead-centre in this deadly recipe to stir up a profit brew is the core ingredient – the small depositor. He is hapless, unsuspecting and unaware.

The writer can be reached on narayanrajeev2006@gmail.com. Views expressed are personal