For better returns, mutual funds have become a lucrative option over fixed deposits among savers and therefore, banks are facing trouble as money put in them, which help in the economy to grow, are now being pumped into the markets which could involve risk.
Better rates in mutual funds (MFs) are pushing the savers away from fixed deposits, leaving banks worried.
Indian Banks’ Association (IBA) chairman and CEO of Central Bank of India, MV Rao, explaining why fixed deposits can’t offer mutual fund-like rates
5 reasons on why FDs can’t offer MFs like rates:
1 – Returns by mutual funds are higher, Indian Banks’ Association (IBA) chairman MV Rao said, who further mentioned that banks’ deployment of resources is regulated tightly and therefore, no one can get higher returns from the deployment.
2 – Rao said that unlike MFs, the end use of banks’ deployment of resources has to be ascertained at the end of every level and there is a restricted rate of interest for many of the asset products that banks are offering.
3 – Mutual funds do not have end use verifications and restrictions on priority sector or to the MSME or government schemes, and, therefore, Mutual funds can offer more than bank deposits.
4 – Explaining further, Rao said when a mutual fund invests in a AAA company they don’t have to make any provisions but for a bank even for a AAA company it will have to make provisions of 20 per cent.
5 – There are a lot of differences in deployment and therefore, returns are less and banks are unable to pass it on to depositors.
The remarks were made by Rao at a CEO panel discussion at the FICCI-IBA organised banking conference.
Rao was, however, contradicted by HSBC India CEO Hitendra Dave who said it would not be right to say that because people put money in MFs there is less money for banks to tap as ultimately the liquidity is coming back into the system.
“I think it will be good for IBA to actually do a study as to what typically causes deposit creation because if we keep blaming systematic investment plans and MFs we will be solving the wrong problem. In 2020 and 2021 the banking system had enormous pools of liquidity, so banks naturally went a little slow on liabilities. Banking books are slow to react but now that is happening you will see differently,” Dave was quoted as saying by the Economic Times.
Meanwhile, Bank of Baroda executive director Beena Vaheed said that most of the public sector banks are competing with others as everyone is after funds, especially the low-cost ones, that are available in the market.
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Why fixed deposits can’t offer mutual fund-like rates: 5 points
