Amid concerns being raised about the falling deposit level in banks, the Indian Banks Association (IBA) said on Thursday that retail deposits are moving from banks to mutual fund schemes due to easy rules. IBA Chairman M V Rao said at the annual FIBAC conference that it is easier for mutual fund companies to give higher returns to investors due to easy rules. However, Kotak Mutual Fund Managing Director and Chief Executive Officer (CEO) Nilesh Shah expressed his inability to understand the claim that how the blame for the slow deposit growth of banks can be put on mutual fund companies.

Low deposit growth seen in the banking system
In fact, low deposit growth has been seen in the banking system for more than a year. In such a situation, concerns are being raised about its ability to maintain loan demand. The industry, including RBI governor Shaktikanta Das, believes that savers prefer to park their money in high-return mutual funds (MFs) and this is confirmed by the rise in monthly inflows to companies managing mutual fund schemes. Rao, who heads the Central Bank of India, said that while investment of funds for banks is governed by regulations, there are no such restrictions on MF companies.

99% of mutual fund investors do not do research

He said MF companies face no end-use verification and banks cannot ‘direct’ customers to park their funds with them. Rao also said that 99 per cent of mutual fund investors do not do any research and act as a group to place their bets, which can lead to risky results. In contrast, Shah, a member of the Prime Minister’s Economic Advisory Council, pointed to factors such as government balances being taken out of the banking system, the presence of small savings schemes and banks keeping currency distribution in the exclusive domain for slow deposit growth. Shah also shared experiences from the US and other markets to make it clear that such allegations of slowing deposit growth in the world’s largest economy are not true. However, Shah said he has asked Chief Economic Adviser V Anantha Nageswaran to ensure that government balances are deposited in banks, which will also earn the government interest of up to Rs 12,000 crore annually.