DISINTERMEDIATION IN INDIA'S HOUSEHOLD SECTOR FINANCIAL PORTFOLIOS*

The stages-of-development theory (Rybczynski, 1986) tells us that the value of the banking relationship gets eroded over time due to increased competition from other financial firms and markets, rise in market interest rates etc., such that shifts take place in flows of funds away from bank deposits and into other financial instruments. The flow of household savings into bank deposits declines relatively markedly as more and more market instruments attract these savings. The proportion of public deposits declines and the significance of purchased (brokered) funds rises in the total sources of banks' funds. In other words, financial disintermediation takes place on the liabilities side of banks' balance sheets. Thus, more regulation of banks than other financial firms, increasing government deficits and the consequent issue of new instruments competitive with bank deposits coupled with corporate customers' expanding preferences for greater use of securities and markets in place of bank lending, all confluence into contributing to financial disintermediation and erosion of the banking relationship. Since deposits constitute the single largest source of funds of banks, disintermediation in the form of relative decline in the flow of hausehold savings into bank deposits poses the biggest threat to the business of banks. This relative deposit decline is defined as disintermediation in this study and it leads us to an econometric investigation of household preferences for deposit form of saving vis-a-vis other forms of financial saving. Similar investigation into disintermediation of bank lending falls beyond the scope of the present study as it requires an examination of the preferences of corporate customers for market borrowing vis-a-vis bank borrowing. Rest of the study is organized as follows: Section 2 briefly reports on the trends in household sector's savings patterns during the last two decades; section 3 derives the simple portfolio model of household financial asset preferences; while section 4 reports data description, econometric estimation and meas urement fo disintermediation, section 5 presents concluding remarks with caveats and suggestions for further research on the problem.