Come 2025, Indian financial markets are seeing something that they don’t see often. Banks, which, forever, used to seek deposits or borrow from the market to lend are doing something strange: they are pouring funds into mutual funds which, partly, compete with them for a share of the investor’s wallet.
Banks’ mutual fund investments jumped 91% on year to ₹1.19 lakh crore as on March 21, 2025, from ₹62,499 crore a year earlier, data from the Reserve Bank of India (RBI) bulletin showed. Banks’ MF investments had grown 28% in the previous year.
The fundamental business of banks is to lend to individuals who are keen to buy homes and cars, or to those entrepreneurs and companies which are looking to put up plants or set up services business. But they seem to be keen on giving funds to MFs instead of directly lending to borrowers. Why is it?
There may be two reasons for that-one, that there is not much demand for loans from banks, and second, that they are suddenly finding themselves with surplus funds because of what the monetary authorities are doing.
“Besides suboptimal credit growth, bank investments in mutual funds schemes have gone up due to surplus liquidity conditions, favourable market conditions and relatively faster execution,” said Vinod AN, general manager and treasury head at South Indian Bank.
Banks loans grew 12.1% in FY25, down from 16.3% a year earlier. This is probably due to slowing income growth and uncertainties on the jobs front for many. This situation is the opposite of what was the situation in the year before when loans grew 16.3%, and deposits were at 12.9% growth. This led to a lot of debate about whether there is a behavioural shift in savers.
“Households and consumers who traditionally leaned on banks for parking or investing their savings are increasingly turning to capital markets and other financial intermediaries,” said former RBI governor Shaktikanta Das. “While bank deposits continue to remain dominant as a percentage of financial assets owned by households, their share has been declining. Households are turning to other avenues for deploying their savings instead of banks.” While individual behaviour was part of the problem, there was also a monetary phenomenon at work. The RBI, which wanted to tame inflation kept the monetary conditions tight, forcing banks to borrow from it or the market. But that has since changed to accommodative from neutral.
Indian banking system is in surplus at ₹1.5 lakh crore. Banks probably have more than what they need to meet the loans demand.
Banks are parking excess funds with MFs. Are they buying shares? Or, are they doing SIPs? Neither. They know that this is a short-term issue. They are also doing something to earn higher short-term returns. “Most investments are in liquid and money market schemes, which is also reflected in the MF investment numbers where investments are in zero risk short-term debt instruments such as T-bills where returns are higher,” said Venkat N Chalasani, CEO, Association of Mutual Funds in India (AMFI).