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Large Indian banks are showing a clear inclination when it comes to selling mutual funds. A majority prefer to sell products of their own asset management companies (AMCs).
This helps financial institutions such as banks corner a lion's share of the commission benefiting the group at large.
Consider this: State Bank of India (SBI), the country's largest lender, earned a total commission payout of Rs 62.12 crore in 2015-16. What is striking is the fact that nearly 98 per cent of it or Rs 60.64 crore has come only from selling products of its SBI Mutual Fund.
The story is about the same in the private sector. ICICI Bank and Axis Bank, among the largest private lenders, earned 61 and 66 per cent, respectively, of the total commission, solely by pushing their own fund houses' products in 2015-16.
The figure for HDFC Bank and Kotak Mahindra Bank stands at 35 and 27 per cent, respectively.
Sector executives see it a normal practice.
"What's wrong in it?" asks the chief executive officer (CEO) of one of the bank-sponsored fund houses. "As long as my products are being sold, why should I not engage and leverage my parent's strong channel network. After all, it's business and it does not matter whether the distributor is my parent or associate."
Independent analysts agree to some extent but add it might not be a healthy practice if own products are pushed blindly.
Dhirendra Kumar, CEO of Value Research, says, "Selling mutual funds in this country is not easy. If banks are pushing funds, it's a great service to the nation. And, why would a bank sell products other than of its own fund house? Selling own funds does not mean it is not in the interest of investors. However, having said that, if banks act like advisors, the clients' interest is prime and it calls for advising other fund houses' schemes, too."
Hemant Rustagi, CEO of Wiseinvest Advisors, says, "A lot also depends on how fund houses engage with banks as distributors. A Bank selling its own fund house's products also have an easy acceptance among its clients as it's the trust in the brand that readily connects investors. However, looking from a different perspective, concentration of own schemes in investors' portfolio may not be a healthy signal. Products sold should suit investors' needs as clients' interest is of utmost importance, irrespective of the fact that such schemes may or may not be of its group's AMCs."
The year 2015-16 was tough for distributors of the Rs 14-lakh-crore sector. With several measures to cap the commission and regulatory pressure for trail commission over upfront commission, the total outgo of fees to distributors dipped 23 per cent to Rs 3,648 crore in FY16 from Rs 4,729 crore in FY15. Large distributors, mainly institutions, were hit the hardest.
HDFC Mutual Fund was the biggest paymaster in terms of collective payout of the commission at Rs 584 crore. ICICI Prudential Mutual Fund, India's largest fund house, was next at Rs 470 crore; followed by Franklin Templeton, which paid Rs 305 crore.
Some fund houses continue to follow the upfront norms, though capped; others prefer a trail-based model.
Further, commission amount also depends on the negotiation power of a distributor. For some, the upfront commission is 70 basis points (bps) while for others it is 90-100 bps.
