Small Savings Rates Cripple Indian Banks: A Funding Crisis Looms

• Indian banks face a funding crisis as deposit growth lags loan growth, forcing reliance on costly market borrowings.
• Government-backed small savings schemes offer rates banks cannot match, creating a structural disadvantage and distorting the market.
• Households prefer safe, tax-advantaged small savings, while banks struggle with expensive or unstable funding sources.
• Inefficient deposit mobilization squeezes bank margins, slows monetary policy transmission, and constrains lending growth.
• Aligning small savings rates with market conditions is crucial for banks to price deposits commercially, improving lending and financial stability.

Why It Matters: High small savings rates are stifling Indian banks' deposit growth and profitability, hindering lending.