It's Banks Versus MFs Over Slow Deposit Growth; Lenders Feel Let Down By Regulations

It became lenders versus MF industry at the annual FIBAC conference on Thursday with Indian Banks' Association saying easier regulations are responsible for shifting of retail deposits from banks to mutual fund houses.

IBA (Indian Banks' Association) chairman M V Rao said easier regulations help mutual funds deliver higher returns to investors, while Kotak Mahindra Bank's managing director and chief executive Nilesh Shah said he is unable to understand how the blame for slower deposit growth can come at the MFs' door.

For more than a year, the banking system has been grappling with lower deposit growth and concerns have been raised over its ability to sustain the credit demand.

Industry watchers including RBI Governor Shaktikanta Das have spoken about a preference among savers to park their money in the higher yielding mutual funds for this, and the same is supported by data showing an uptick in monthly flows into AMCs (asset management companies).

Rao said deployment of funds is governed by regulations for banks, while MFs do not have such restrictions.

On the other hand, Shah, who has also been a member of the Economic Advisory Council to the PM, pointed to factors like shift of government balances out of banking system, presence of small savings schemes, and distribution of currency being the exclusive preserve of banks to explain the slower deposit growth.

"I am not taking away any money from bank deposits," Shah said, speaking at the annual FIBAC 2024 Conference organised jointly by FICCI and IBA here.

In support of his argument on the regulations front, Rao, who also heads the state-owned Central Bank of India, said there are no end use verifications which the MFs have to face and added that the banking industry cannot "dictate" customers to park their funds with them.

Going forward, an "active participation and involvement" of the government and the regulators is required to ensure that depositors get higher returns and the banking system gets the raw material to fund the country's growth.

Rao also said that 99 per cent of the MF investors do not undertake any research while making their investment calls, and act as a group if not a herd to place their bets which can be fraught with ominous outcomes.

"...going forward after 6 or 7 years when the cycle turns, definitely this will have a lot (2:42) of systemic risks that may come up," he warned.

The banker said there is no provisioning which a MF has to do while investing the investors' money, while a bank has to set aside a good amount as provisions even for standard or well-rated assets.

Kotak AMC's Shah shared experiences in the US and other markets to illustrate how such accusations of deposit growth being slower are not made in the world's biggest economy.

Shah, however, said that he has asked Chief Economic Advisor V Anantha Nageswaran to ensure that the government balances are parked with the banks and said that this will also earn the government an interest of up to Rs 12,000 crore a year.

Among the bankers, HSBC's Hitendra Dave was not convinced with the argument about MFs being responsible for the slow deposit mobilisation.