Household savings flow to financial market could pose risks, says finance ministry

New Delhi: The finance ministry informed the Parliament that a shift in household deposits from banks to market-linked financial products in search of higher returns may expose the households to significant market risks and that they may face financial losses during market corrections or volatility due to inadequate assessment of risks and financial literacy.

The Department of Financial Services, under the finance ministry, said in a written submission to the parliamentary standing committee on demand for grants that the “decline in financial savings poses challenges for the banking sector in terms of maintaining liquidity”, adding that withdrawal of household savings from banks would disrupt banks’ access to cheap source of funds, which would lead to a rise in the cost of funds for banks.

Key Suggestions

The committee, in its recommendations in a report tabled in Parliament on Wednesday, called for proactively addressing liquidity concerns, enhancing customer attraction, especially in underserved areas, and leveraging technology for operational efficiency so that banks can mitigate the impact of declining CASA (current account savings account) ratios.

FDI in insurance
On the issue of the budgetary announcement of 100% foreign direct investment (FDI) in the insurance sector, the committee underscored the need for some safeguard measures to be in place to counter concerns such as profit repatriation, which refers to foreign investors sending earnings back to home countries rather than reinvesting in India, reduced decision-making power of domestic firms and job security concerns arising from potential automation and cost-cutting measures. While highlighting other issues such as the focus on high-margin policies and neglecting rural and financially weaker sections, the committee recommended that the downside of FDI in India’s insurance sector be dealt with “adequately and scrupulously”.

Grievance redressal
While noting that the number of complaints received under the Reserve Bank of India’s Integrated Ombudsman Scheme had increased at a compounded average growth rate of almost 50% over the past two years to about 934,000 in 2023-24, the committee said mechanisms should be put in place for resolution of grievances spanning multiple sectors.

Jan Dhan accounts
The committee made a case for ensuring that accounts opened under the scheme are active and not dormant or fraudulent and recommended rigorous verification of account details and regular audits of account activity.

“Discrepancies should be thoroughly investigated and accounts that are inactive for prolonged periods or found to be fraudulent should be deactivated,” it said.