Banks and Mutual Funds at Odds Over Sluggish Deposit Growth Due to Regulations

At the annual FIBAC conference on Thursday, a debate emerged between lenders and the mutual fund (MF) industry. The Indian Banks Association (IBA) attributed the shift of retail deposits from banks to mutual funds to easier regulations. M.V. Rao, chairman of IBA, argued that these regulations enable mutual funds to offer higher returns to investors.

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For over a year, the banking sector has faced slower deposit growth, raising concerns about meeting credit demand. Industry experts, including RBI Governor Shaktikanta Das, noted that savers prefer higher-yielding mutual funds. Data supports this with an increase in monthly flows into asset management companies (AMCs).

Regulatory Differences

Rao highlighted that banks are bound by strict regulations for fund deployment, unlike mutual funds. He stated, "There are no end-use verifications which the MFs have to face." This regulatory disparity allows mutual funds more flexibility in delivering returns.

Nilesh Shah, managing director and CEO of Kotak Mahindra Bank, countered Rao's points. He questioned how mutual funds could be blamed for slower deposit growth. Shah mentioned other factors like government balances moving out of the banking system and small savings schemes impacting deposit growth.

Concerns Over Systemic Risks

Rao expressed concerns about the potential risks associated with mutual fund investments. He noted that 99% of MF investors do not conduct research before investing and tend to follow group behaviour. "Going forward after 6 or 7 years when the cycle turns, definitely this will have a lot of systemic risks that may come up," he warned.

Shah shared experiences from the US and other markets to illustrate that such accusations are not made in larger economies. He also suggested that government balances should be parked with banks to earn interest, potentially up to Rs 12,000 crore annually.

Bankers' Perspectives

Among bankers, Hitendra Dave from HSBC was sceptical about blaming mutual funds for slow deposit mobilisation. Shah reiterated his stance at the conference organised by FICCI and IBA, stating, "I am not taking away any money from bank deposits."

Rao also pointed out that banks must set aside provisions even for well-rated assets, unlike mutual funds. This requirement adds another layer of complexity for banks compared to mutual funds.

The discussion underscored the need for active participation from the government and regulators. Rao emphasised that this involvement is crucial to ensure depositors receive higher returns while providing banks with the necessary resources to support economic growth.

The debate at FIBAC highlighted differing views on regulations and their impact on deposit growth. While mutual funds offer higher returns due to fewer restrictions, banks face challenges due to stringent regulatory requirements.