Depositors as Silent Stakeholders: Time to Restore Balance in Indian Banking

In the architecture of modern banking, one truth remains fundamental yet under-acknowledged: banks are sustained by depositors’ money. Every rupee lent, invested, or deployed by a bank originates from the trust reposed by millions of ordinary citizens. Yet, paradoxically, depositors remain the least protected and least rewarded stakeholders in the banking system.

This structural imbalance requires urgent attention if India is to build a truly resilient and equitable financial system on its path toward a “Viksit Bharat” by 2047.

The Unequal Burden on Depositors

Depositors today bear a silent but substantial burden:

• They receive interest rates that often fail to match inflation, eroding real savings. Even interest attracts Income tax is a very sad part.

• They indirectly absorb the consequences of non-performing assets, frauds, and weak credit appraisal.

• They face penalties and charges, including for not maintaining minimum balances.

• Their protection is limited to a modest insurance cover of ₹5 lakh per depositor through the Deposit Insurance and Credit Guarantee Corporation.

Despite providing the primary resource base of banks, depositors lack representation, voice, and adequate safeguards.

A Unique Sector Demands Unique Governance

Banks are not ordinary commercial enterprises. They deal with the most sensitive public resource—money—and the most dynamic asset—human trust. Equating banks with other businesses in governance philosophy is a conceptual error.

The regulatory framework led by the Reserve Bank of India has evolved considerably over time, but systemic issues persist:

• Risk is socialised, while decision-making is concentrated

• Returns to depositors are controlled, while inefficiencies in lending are tolerated though bad and recalcitrant  borrowers deserve a different treatment in depositors'  and all stakeholders of Banks' interest. 

• Transparency in charges remains uneven

In such a structure, depositors effectively subsidise inefficiency.

The Question of Charges and Penalties

The imposition of penalties for non-maintenance of minimum balances raises a fundamental ethical and economic question.

In an era of core banking, digital transactions, and negligible marginal cost of servicing accounts, such penalties—especially on small depositors—appear regressive and disproportionate. They resemble revenue extraction rather than genuine cost recovery.

Financial inclusion cannot coexist with punitive fee structures.

The Interest Rate Paradox

Savings bank deposit rates around 3–4 percent and term deposit rates in the range of 6–7.5 percent often fail to compensate for:

• Consumer inflation

• Food inflation

• Healthcare and education costs

• Increasing cost of living in urban India

Thus, depositors face financial repression in real terms, even while bearing systemic risk.

Governance Failures and Moral Hazard

Repeated cycles of large non-performing assets, frauds, and recapitalisation—particularly in public sector banks—point to deeper governance issues:

• Weak accountability in credit sanction

• Political or institutional interference

• Delayed recognition of stress

• Evergreening of loans

When losses occur, they are ultimately absorbed by taxpayers and depositors, creating moral hazard and eroding trust.

Rebalancing the System: A Policy Agenda

To restore equity and confidence in the banking system, a series of structural reforms are necessary:

1. Strengthening Depositor Protection

• Enhance deposit insurance coverage to ₹10–15 lakh

• Introduce risk-based insurance premiums linked to bank risk profiles

2. Ensuring Fair Returns

• Introduce inflation-linked deposit instruments

• Create a benchmark-linked floor rate for small depositors

3. Reforming Governance

• Professionalise bank boards with independent oversight

• Enforce accountability for large credit decisions

• Strengthen early warning and resolution systems

• Introduce  Incentive / penalty based on the rating of borrowers  and ensure that the cost of NPAs to banks are borne by banks and borrowers themselves. Heath of the banks is dependent on the health of borrowers and the health of the economy is dependent on the health of the banking and entire Financial system. 

4. Rationalising Charges

• Cap and standardise penalty charges

• Mandate zero-penalty basic banking accounts

• Ensure full transparency in all fees and commissions

5. Institutionalising Depositor Voice

• Establish Depositor Protection Councils

• Include depositor representation in policy consultations

6. Strengthening Supervision

• Real-time monitoring of large exposures

• Time-bound resolution of stressed assets

• Strict enforcement against fraud and wilful default

• Scope for AI based checks and balances to detect erratic and fraudulent entries. 

The Larger Economic Imperative

India’s aspiration to become a developed economy by 2047 rests critically on a stable, trusted, and efficient financial system.

Trust in banks is not built merely on capital adequacy or regulation—it is built on fairness to the smallest depositor.

If depositors begin to feel:

• under-rewarded,

• over-charged,

• and under-protected,

then the very foundation of financial intermediation is weakened.

Conclusion: Recognising the Silent Pillar

Depositors are not passive providers of funds. They are the silent pillars of the banking system.

A fair banking system must ensure that those who provide the foundation are:

• protected,

• respected,

• and reasonably rewarded.

Rebalancing the system in favour of depositors is not a concession—it is a necessity for long-term financial stability, ethical governance, and inclusive economic progress.

Only then can India’s banking system truly align with the ideals of equity, trust, and shared prosperity that underpin the vision of a developed nation.

T V G Krishnan

( personal Views)

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