Banks Vs. Mutual Funds: Regulations Blamed for Shift in Retail Deposits
The Indian Banks’ Association today expressed its concern over the migration of retail deposits from banks to mutual funds at the annual Financial Institution Benchmarking and Calibration Conference. IBA claimed that slack regulations for mutual funds allow them to pay higher returns to investors. Contrary to this, a top bankers of a private leading bank opposed this statement of Srivastava and said that it is confusing for him as to why blame mutual funds for slower deposit growth in banks.
The banking system in India has been struggling with slow deposit growth for over a year, raising concerns about its ability to meet rising credit demand. Industry experts, including those from the Reserve Bank of India, have pointed out that many savers are now choosing mutual funds over traditional bank deposits due to the higher returns. Indeed, this is evidenced by the increased monthly inflows into mutual funds.
From the IBA’s perspective, on one hand, banks are under tighter regulatory demands pertaining to deploying funds while on the other, mutual funds have fewer restrictions. The association made it known that mutual funds are not required to conduct end-use verifications or make provisions, something banks must do even for highly rated assets. If left unregulated, it has the potential to give rise to systemic risks, particularly since a large number of mutual fund investors do not themselves research an investment decision.
The reasons adduced by the banking executive for slower deposit growth, however, were different that is the shift of government balances out of the banking system, the existence of small savings schemes and the exclusive role of banks in currency distribution. He said blame should not be put on mutual funds for this problem, citing examples of other countries where such excuses are not taken.
There was also a proposal to park government balances in banks, which would fetch a considerable interest for the government, a sum as high as Rs.12,000 crore annually, it is learnt. The proposition has already been discussed with top economic advisors of the government.
Another senior banker who was heading the Indian subsidiary of an international group expressed skepticism over mutual funds being attributed as the reason for slow deposit growth and indicated that the problem might be actually something else.
The IBA, in turn, concluded by insisting on greater involvement by the government and regulators so that banks could attract more deposits and give higher returns to depositors. If left unchecked, the present trends are sure to create future risks to the financial system.
