Are bank deposits going to be more attractive for customers? That seems to be the only way forward as the growing concern about losing out to the mutual fund sector that is weaning away more and more household savings from banks has led the chairman of the apex Indian Banks Association (IBA) to cry out for government intervention to make deposits more attractive. Speaking at the IBA-FICCI national banking summit IBA chairman M V Rao said that systemic risks would emerge if the outflow of deposits from banks continue.
Rao, who is also the MD and CEO of the Central Bank of India, virtually painted a picture of helplessness vis-à-vis the competition from mutual funds to get hold of savings from people. He mentioned that banks are constrained by regulatory limits on deposit rates and cannot do anything substantive to prevent deposits from flowing out to MFs.
FDs vs Mutual Funds
Rao also pleaded for a level playing field between the banks and the MFs. Recently, many banks have begun to offer higher interest rates on FDs for fixed periods. However, it clearly not enough. The youth are jumping on the equity and MF bandwagon more than ever before.
Banks offer only 2.75-5% on savings accounts. FDs (Fixed Deposit) do not offer anything more than 8-9% at their peak while most banks limit their offering within 8%. Moreover, that interest income is subject to income tax. On the other hand, MF schemes offer 12% as a conservative template.
Banks highlight risk in MFs
“Our analysis of mutual fund investors shows that 99% do not evaluate the technical or fundamental aspects of their investments; they simply follow trends. This could pose significant systemic risks when the market cycle turns, as mutual funds invest in companies or stocks and do not make provisions like banks, which must provision 20% even for AAA-rated investments,” remarked Rao.
“If the health of banks deteriorates, not only will a very big section of the markets go down since the financial sector has a direct presence in vast sections of the market, but also the broader economy could be adversely impacted. Therefore, the economic policymakers of India have to respond to this growing concern,” remarked Nilanjan Dey, financial strategist and director, Wishlist Capital.
Finance Minister Nirmala Sitharaman and RBI governor Shaktikanta Das have already flagged the challenge banks are facing since credit is growing at a faster rate than deposits in most banks and urged them to think of solutions. Biz News Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
