PSU BANK ARE STRUGGLING

PSU Banks Fret as MF Debt Assets Outpace Fixed Deposits

MFs garner . 1.9 lakh cr between Apr ’12 & Feb ’13 even as banks struggle to maintain CASA ratios

    While banks are finding it tough to attract customers for deposits, the mutual fund industry has collected about . 1.90 lakh crore between April 2012 and February 2013 from corporates and HNIs (high net worth individuals) , taking the total asset size of the debt segment to nearly . 5 lakh crore, according to Morningstar, a USbased global fund tracker.
Worried by this development, some bankers of state-run banks have met finance ministry and Reserve Bank of India officials, expressing their concerns over the growing debt asset size of mutual funds, said a person close to the industry who didn’t want to be identified.
“Mutual funds are a competing source which has been one of the reasons for slower deposit growth last year,” said BK Batra, executive director, IDBI Bank. “But it is something here to stay and one has to deal with it,” he added.
Banks are facing stiff challenge to maintain their CASA (current and savings account) ratio, as mutual funds are delivering higher returns on debt products. Bank deposits grew at a sluggish 13.1% year-onyear basis till March against 14.4% a year-ago.
“I think mutual funds don’t pose a danger to banks’ deposit mobilisation so far because their total asset size is not huge,” said Sanjay Arya, executive director, United Bank of India. “We are also expanding in rural and unbanked areas, where their reach is limited. So, as rural incomes grow, banks will benefit from that. The last reason is there’s certainty of returns with bank deposits, which is not the case with mutual funds,” he added.
Corporates and HNIs are availing of mutual fund debt schemes in an elaborate way to park their short-term surplus money on hopes of a rally in debt market as interest rates are seen headed southwards.
“Most corporates and HNIs are investing in shorter-duration debt schemes on expectations of a rally in debt market as interest rates are expected to ease going, forward,” said S Naren, chief investment officer, ICICI Prudential. “The Reserve Bank of India has cut interest rates by 50 basis points in the last three months; we expect more rate cuts in future.”
The liquid, or short-term funds, are very popular with corporates and HNIs, as average returns are 50-basis points higher than bank fixed deposits, besides there’s greater flexibility in entering and exiting mutual fund schemes than FDs .
“Corporates and HNIs are finding the current investment environment more suitable for FMPs (fixed maturity plans) than FDs due to income tax and indexation benefits,” said Dhruva Chatterji, senior research analyst at Morningstar. “Last year, we have seen significant flows to debt mutual fund products, and over the past couple of months, FMPs offered from mutual funds have seen good subscription.”
“Corporates and HNIs are investing in income and money market schemes since there’s a tax arbitrarge over fixed deposits. The banks deduct TDS when money is withdrawn, whereas in mutual funds, investors are relieved of tax hassle,” said Jimmy Patel, CEO, Quantum Asset Management.