Banks offer loans to invest in own mutual funds

The Securities and Exchange Board of India (Sebi) is said to be looking into complaints lodged by some private sector mutual funds against the "predatory marketing" by bank-sponsored mutual funds.

These bank-sponsored funds, particularly private bank-sponsored funds, are funding investors to invest in their group mutual funds.

In the last two months, a number of banks have been extending loans to investors to enable them to invest in mutual fund schemes in a big way.

Interestingly, a number of foreign banks that have floated mutual funds have joined the race in the last one month.

What started off as a funding option to investors to invest in the initial public offer of new schemes has been transformed into a full fledged retail loans business.

An executive at a private sector bank said, "With the stock markets booming, a lot of investors want to join the rally now through the mutual fund route, which is seen comparatively safer than directly investing in the stock markets."

More banks have joined the initiative, forced by customer demand. Customers are willing to put up with 13-15 per cent interest rates, as they see higher earnings through mutual fund investments.

The high dividends announced in the recent past have egged on bank customers to migrate from bank deposits to mutual funds.

Banks say they are only responding to a genuine customer demand, a view echoed by the Association of Mutual Funds (AMFI), the industry body. AMFI chairman A P Kurian told Business Standard: "Since the banks are lending against securities, I see nothing wrong in it."

But non-bank sponsored mutual funds say the practice is predatory because it gives bank-sponsored funds an unfair advantage. But they concede the regulatory guidelines are fuzzy.

The Reserve Bank of India of India has not issued any specific guidelines to banks on the issue. Banks are permitted to lend up to five per cent of their incremental deposits as loans against equity.