Banks are at a disadvantage to mutual funds (MFs) because they have to face regulatory restrictions like end use monitoring, which has made bank deposits unattractive, Indian Banks’ Association (IBA) chairman MV Rao said. Banks will need help from the government and the regulator to attract savers to invest in bank deposits which are helping the economy to grow rather than putting money in the markets which could involve risks.
“Returns by MFs are higher because banks’ deployment of resources is regulated so tightly that you cannot get higher returns from the deployment. At every level the end use has to be ascertained and you have restricted rate of interest for many of the asset products that banks are offering. MFs do not have end use verifications and restrictions on priority sector or to the MSME or government schemes. That’s why MFs can offer more than bank deposits,” Rao who is also the CEO at Central Bank of India said at a CEO panel discussion at the FICCI-IBA organised banking conference.
He said that “99% of the investors in MFs” are not analysing technical or fundamentals and are investing like a group, but in the next six to seven years when the cycle turns a lot of systemic risks could surface because of this. Rao said RBI provisions for banks is also a dampener. “When a MF invests in a AAA company they don’t have to make any provisions but for a bank even for a AAA company you will have to make provisions of 20%. So, there are lot of differences in deployment that’s why returns are less and we are unable to pass it on to depositors but this is the reality,” Rao said.HSBC India CEO Hitendra Dave it will be an over simplification to say that just because people put money in MFs there is less money for banks to tap because ultimately that liquidity comes back into the system. “I think it will be good for IBA to actually do a study as to what typically causes deposit creation because if we keep blaming systematic investment plans and MFs we will be solving the wrong problem. In 2020 and 2021 the banking system had enormous pools of liquidity, so banks naturally went a little slow on liabilities. Banking books are slow to react but now that is happening you will see differently,” Dave said.State Bank of India chairman CS Setty said banks are finding it difficult to garner deposits for special schemes like green deposits because savers are not willing to take lower rate on green deposits. “No depositor is willing to keep their money at a lower rate. One way to do it is to ensure that the greenium on loans is front ended. The cost of compliance on a green bond also is much higher than the 2 to 3 basis points we save on it,” Setty said.
But bankers agree that they will have to rethink their marketing strategy to get more deposits from rural India, senior citizens and middle income groups. India’s banking sector is lagging in its deposit growth and this has emerged as a pain point in the last year. Credit rose 13.6%, while deposits rose 10.9% in a one year period till in August, latest central bank data showed.
“Most of the public sector banks, for example us, have a huge rural and senior network, which was traditionally a lock-in kind of area for us. We are also competing with the others, because everyone is after these funds which are available in the market, especially the low-cost funds”, said Beena Vaheed, executive director at Bank of Baroda.
