Adventure deposits: A win-win-win proposition for India’s banking industry as interest rates decline

First, the debt market is one largely for higher rated companies. If the rating of a bond or debenture is not AA or AAA, it is hard to find investors.

Second, those who cannot access the bond market can still borrow from banks (so we have financial inclusion).

Third, almost all bank lending, except when it is specified as being unsecured, is backed by collateral; hence lower rated units can borrow on this strength.

Fourth, banks also invest in securitized assets, where a pool of assets is segregated by seniority for sale to other investors; asset pooling is not new.

Last, a green ecosystem has emerged where banks raise ‘green deposits’ for deployment in green lending, just like how green bonds enable the same.

Can all these characteristics be put together to create a new kind of deposit product that is guided by the market and addresses the needs of borrowers that lack good ratings?

There does exist a market for ‘junk bonds’ or sub-investment grade debt instruments. This is not a market for ‘losers,’ but one that lets lower-rated companies raise funds from investors ready to accept higher risk for better returns.

These bonds typically offer higher rates of interest. According to S&P, the trailing 12-month default rate for speculative-grade debt was about 4% for the past two years and averaged 4.8% as of August 2025. This is a higher return than what better rated bonds offer and seen as compensation enough for the risk taken.

This idea can be mimicked in the banking space. The pricing of deposits and loans can be fixed in advance. Deposits used for financing loans below investment grade can be rewarded with higher returns. Therefore, a one-year deposit that presently offers 5.85-6.6% can be elevated by 200 basis points, with this premium passed on to such deposit holders.

To this, we could add the bank spread based on risk assessments and other accompanying costs, much like how loans are priced above the MCLR (marginal cost of funds-based lending rate) today.

Theoretically, if the net interest margin of banks is 3% and the deposit premium is 2%, the special lending rate could be 10.85-11.6%, which is 5% above the usual deposit rate. If the bank would like a bigger margin for such loans, the final lending rate can be upped accordingly.

At the practical level, such deposits, which could be called ‘adventure deposits,’ would be used for lending to, say, BBB or BB rated firms.

The deposit’s guaranteed return would be equal to the savings deposit rate until it is deployed for special lending. Once a tranche of deposits is lent, the deposit rate would be determined based on a pre-decided formula as described above. The return for the first period, which can be a quarter, would go by the formula. However, there would be quarterly repricing, depending on the performance of the pool of such loans. In a way, this would amount to market- determined pricing.

If some loans are not serviced on time and the bank must set aside a provision to cover it, this could be adjusted within the bank’s total interest earnings available for distribution to deposit holders, with adventure depositors taking a slight hit. At an extreme, if loans are written off, then these deposit holders would get even lower returns. As the entire pool is very unlikely to fail all at once, there would always be better returns for adventure savers. This is the advantage of loan diversification.

The adventure-deposit approach uses three concepts. The first is deposits linked to a specified class of loans. Second, loan pooling, as seen in asset securitization. Third, variable interest rates on deposits, much like the floating-rate bond offered by the government to individuals, based on the performance of the adventure pool of loans.

The idea can turn out to be a win-win solution for all concerned. While banks will have to bear the pass-through of higher-cost deposits, they would also be able to attract more funds for lending and improve their overall performance. As these loans are collateralized, there would be no material change in the way credit evaluation is done.

From the perspective of lower-rated borrowers, this would still be a good option, as such loans would be cheaper than those taken from non-bank financial companies and fintech firms. Deposit holders would be better off with higher returns and also assured that sub-investment grade loans are backed by collateral. For such deposits, perhaps coverage by deposit insurance would have to be withdrawn, since depositors willingly bear some risk for better rewards.

Adventure deposits make sense in today’s low-interest-rate environment that favours borrowers over deposit holders. Savers have been shifting to capital-market instruments and thus showing a greater risk appetite. This makes the introduction of market-linked deposits a tempting idea. It would mimic what is being done by mutual funds, which deploy the money of investors across equity and debt instruments to deliver consistently higher returns.

Bank deposits could do with innovation too. At the very least, the idea of adventure deposits should offer us some food for thought.

These are the author’s personal views.

The author is chief economist, Bank of Baroda, and author of ‘Corporate Quirks: The Darker Side of the Sun’.