Mutual funds (MFs) and other alternative investment options are becoming more and more competitive, which is making it difficult for the Indian banking industry to grow deposits.
The chairman of the Indian Banks’ Association (IBA), MV Rao, emphasized during the FICCI-IBA banking conference that mutual funds had higher returns than banks since they are not bound by the same regulations. As a result, investor preferences have shifted in favor of MFs, which makes it challenging for banks to keep a competitive edge in deposit mobilization.
Due to competition from mutual funds that offer higher yields, the Indian banking industry is finding it difficult to draw deposits. Banks’ capacity to offer alluring returns is restricted by regulations, which causes investor preferences to change. Banks are investigating fresh approaches to deal with this problem and preserve stability. Rao emphasized that banks are constrained in their capacity to provide depositors enticing returns by the regulatory system that governs them, including end-use monitoring and interest rate limitations. He pointed out that mutual funds have greater flexibility and can offer higher yields because they are not compelled to confirm the end-use of money or give priority to any particular industry. “MFs lack end-use verifications, limitations on government schemes, the MSME sector, or the priority sector. Hence, MFs are able to provide benefits beyond bank deposits,” stated Rao.
Concerns over the systemic risks presented by this development have been voiced by bankers in the industry. Rao cautioned that most mutual fund investors are not performing adequate research and that if market cycles change in the future, they could be exposed to serious dangers. Hitendra Dave, CEO of HSBC India, continued, “Weighting the blame on MFs might not be the answer as liquidity eventually finds its way back into the banking system.” Dave recommended banks to look beyond MF competition and investigate the core causes of deposit growth.
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