Mumbai: Commercial banks have drastically reduced their exposure to the Indian mutual fund industry, forcing the funds to look for retail assets.
Banks’ exposure has come down from Rs1.27 trillion in August 2009, when the capital market regulator abolished entry load or upfront commission for mutual fund distributors, to Rs83,827 crore in April 2010, and market experts said it could go down further.
H.N. Sinor, chief executive of industry lobby Association of Mutual Funds of India (Amfi), said his efforts would be towards expanding the retail market, which currently accounts for 30% of the Rs7.7 trillion industry.
“Wholesale money, that account for 70% of the industry, comes from the surplus money of banks and institutions. It has its own relevance and there is no conscious effort to limit it,” he said. But banks are consciously limiting exposure to mutual funds because the banking regulator is not comfortable with it.
Typically, banks invest money in funds’ liquid or debt schemes that in turn invest in money market instruments such as certificate of deposits, commercial papers, and pass-through certificates. Banks can directly invest in most of these instruments, but they use the mutual fund route to get tax exemption.
The Reserve Bank of India (RBI) last year blamed the banks’ practice of investing in such instruments through mutual funds as one of the several factors that contributed to low credit growth. RBI governor D. Subbarao had said then: “There is a concern that through the mutual funds, there is circularity of money.”
“There is a second concern that there could be a regulatory arbitrage in the sense that mutual funds are lending to companies, which banks could not directly lend to,” he had added. Following this, many large state-owned banks, which did not have any investment limit for buying mutual funds, were forced to set a limit for such investments, and most of them decided against exceeding their peak exposure levels in September-October 2009.
Some large private sector banks, too, have brought down their exposure in mutual funds drastically.
According to Karthik Srinivasan, co-head, financial sector ratings, Icra Ltd, large banks typically invest up to 10% of their portfolio in liquid and liquid-plus schemes of mutual funds. “With banks setting internal limits and reducing their exposure, the assets under liquid schemes could go down to Rs55,000-60,000 crore during the current year. The credit offtake of banks is expected to be 20-22% this year, and that, too, will contribute to a reduction in liquid fund investments by banks,” he said.
This will have a significant impact on the mutual fund industry which is witnessing a drastic slowdown in growth since last August.
The assets under management of the Indian mutual fund industry have come down from Rs8.07 trillion in November 2009 to Rs7.7 trillion in April, and since August last year, the industry has grown barely 2.6%.
One reason for this has also been last year’s decision by the stock market regulator to ban entry loads on mutual funds. Distributors, who earned a commission from asset management companies for selling mutual funds to investors, no longer had an incentive to do so.
“With equity inflows also looking lukewarm under the current market scenario, the growth path does not look exciting,” a senior official with a foreign mutual fund said.
The Sensex has dropped 3.37% since January in a highly volatile market, making retail investors wary.
An official at a private sector bank said RBI’s reservations about banks’ investment in mutual funds, coupled with a relatively tight liquidity condition, has led to a reduction in banks’ exposure in mutual funds.
Banks are parking lesser amount with RBI with a decline in surplus liquidity in the system. For instance, in September, on an average banks used to keep Rs1.21 trillion with RBI daily. In April, this came down to Rs62,400 crore, and in May to Rs42,400 crore.
“We’ve reduced our limits by 50% in December. The banking industry’s total investment during the current fiscal could be about Rs80,000 crore. I do not see the industry breaching last year’s peak for the next few years,” the private bank official added.
A public sector banker, on condition of anonymity, said, “RBI is not very comfortable with banks investing in mutual funds. We have other instruments to park money and will prefer not to invest much in liquid schemes.”
Mutual funds are aware of this but they are not blaming banks, said Rajan Ghotgalkar, managing director, Principal PNB Asset Management Co. Ltd, which manages assets worth Rs7,470 crore. “The credit offtake has gone up and banks do not have too much surplus cash. The drop in investment is more of a market phenomenon than a conscious effort by banks.”
Sinor said Amfi was making efforts to expand the retail market by creating investor awareness.