 "Deposit mobilisation: Banks seek level playing field vis-a-vis mutual funds")
Faced with the challenge of raising liabilities, the Indian Banks' Association (IBA) has sought intervention from the banking regulator and government to provide a level playing field for banks vis-à-vis mutual funds.
While mutual funds provide higher returns and have very few constraints on deployment, banks are tightly regulated for charging rates and deployments, according to M V Rao, chairman, IBA.
Rao, who is also managing director and chief executive of Central Bank of India, said at the FICCI-IBA event, “Let us understand why bank customers are moving to mutual funds and how and in what way MFs are offering more returns than the bank deposits... as far as mutual funds and bank deposits are concerned, both are two different ball games.”
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Rao, however, did not specify what exactly should be the intervention from the regulator or the government.
The intense competition for raising resources has forced banks to float special schemes with attractive interest rates, apart from offering additional benefits like insurance cover for retail customers. Most special deposit schemes are in the maturity bucket of 1-3 years.
With mutual funds, there are no restrictions on deployment; MFs are able to offer more returns than bank deposits, he said.
“Going forward, banks can’t dictate to the customers. We have to evolve ourselves and ensure that higher returns are given to the depositors,” Rao said, adding that involvement and active participation of the government and regulators is required so people put money in deposits, which helps the economy, rather than putting the money into the market where risks are involved.
“I do not think 99 per cent of investors in the mutual funds are analysing the technicals or fundamentals. They are just following the group trend. So going forward, after six-seven years when the cycle turns, definitely, this will have a lot of systematic risk, which may come out,” Rao said.
He also said that mutual fund investing in a company does not require some provisions, but banks have to make a provision (20 per cent) even for “AAA” companies. “So there are a lot of differences in the deployment, which is why returns are less (for banks) and banks are unable to pass on benefits to depositors. This is a reality but definitely, the banking industry will come out with innovations,” he added.