The next time you step into the local bank in your neighbourhood, chances are you can be approached by a suave salesman nudging you to buy a mutual fund (MF). Though still a far cry from their new private sector and foreign peers, where the staff is always ready to lure you to invest into insurance policies and MF schemes even if you go there to simply deposit a cheque, these small banks are brushing up on their charm quotient. On offer is a bouquet of funds they think will suit your needs.
Fund houses are happy to oblige them. Seven such tie-ups took place in the last three months, the latest being between ICICI Prudential Asset Management Co. Ltd and Syndicate Bank on 3 October and between Reliance Capital Asset Management Co. Ltd and Ratnakar Bank Ltd on 24 September.
Most of these banks are small in size. For example Ratnakar Bank and Syndicate Bank had loans outstanding of just Rs.4,132 crore and Rs.1.23 trillion , respectively, as of March 2012 compared with State Bank of India’s Rs.8.67 trillion loan book and ICICI Bank Ltd’s Rs.2.53 trillion during the same period. So why are fund houses suddenly finding these small- and mid-sized banks so attractive?
Incentive to penetrate
Effective 1 October, a fund house will be able to charge you higher expenses, if it manages to get inflows from “beyond top 15” cities. Either an asset management company (AMC) should get at least 30% of its inflows from beyond top 15 cities or at least 15% of its assets under management from these places, whichever is higher. If the AMC meets this target, it can charge an additional 30 basis points (bps) to the total expense ratio. One bps is one-hundredth of a percentage point. This money will go to the distributors in those towns to incentivize them.
So, will banks bite the bait? “I think it will work. If more commission is given to such distributors, it leads to more incentive to the branch and the branch manager,” says Milind Barve, managing director, HDFC Asset Management Co. Ltd. In June 2011, HDFC AMC tied up with Ratnakar Bank; the bank’s branches sell HDFC AMC’s MF schemes.
Syndicate Bank, which has branches across India, heads the list in the latest round of tie-ups, with eight fund houses in its kitty. Of a total of about 2,700 branches, Syndicate Bank will start by selling MFs in 476 of its branches. Says Anjaneya Prasad, executive director, Syndicate Bank: “First, we will be aggressive in metro city branches, then we will go to tier-I and tier-II cities and eventually we will start focusing on the rest of the branches.” Prasad admits the income expected from selling MFs is attractive and their records will indicate which branch has sold how many MF schemes to their customers. “The money will go to that branch and obviously, they will benefit,” he adds.
Not a chequered past
But the latest trend of such tie-ups is, actually, not a new phenomenon. Fund houses have been tying up with government-owned banks for a long time. Fund houses such as Tata Asset Management Co. Ltd, ICICI Prudential AMC and HDFC AMC, for instance, have tied up with 22, 33 and 21 of small and mid-sized banks since 2005.
But, inflows have been slow. For instance, IDFC Asset Management Co. Ltd has a tie-up with 10 such government-run and small private sector banks. In FY12, while almost 20% of its total gross inflows came from all banks combined, less than 1% of the inflows came through these 10 banks in FY12.
“These were just photo opportunities for the chiefs of such banks; call a press conference, sign agreements, a handshake for photo opportunity, some razzle-dazzle and they were done. Serious inflows never followed,” says the head of marketing of a fund house, who was part of these agreements in his earlier assignment. He did not want to be named.
According to data provided by Computer Age Management Services Ltd (Cams), one of India’s largest registrar and transfer (R&T) agents, around Rs.11,500 crore came into equity funds through private sector banks compared with just Rs. 1,220 crore and Rs.21 crore that came through government-run and cooperative banks, respectively, in FY12. This data is only for fund houses whose R&T is Cams.
One of the chief reasons, they claim, is because small banks’ priority was to sell fixed deposits and their own products to customers. “Private sector banks woke up to the reality soon that on the back of rising equity markets between 2004 and 2007 that led to many MF schemes giving good returns, investors might also shift their funds lying in their savings accounts and invest in MFs,” says the head of a fund house who did not want to be named. This official adds that in order to ensure that customers still remain within the bank, banks started offering them MF schemes.
The banking push
The story is different now. Apart from earning higher commissions, smaller banks are now slowly waking up to the need to give options to their customers. Says Nitin Chopra, head (retail banking), Ratnakar Bank: “Such offerings are necessary for customer engagement. They are likely to shift their main banking relationships to those who offer them a bouquet of financial products of which investment products form an important category.”
Commissions earned by private sector banks also offer inspiration. According to data disclosed by the Association of Mutual Funds of India (Amfi, the MF industry’s trade body), four of the top five distributors by commission earned are private and foreign banks. “Government-run banks are waking up to the need to offer a holistic solution to a customer’s product needs. It is also called a solutions approach. It cannot just be always about current accounts and savings accounts. Banks are slowly realizing this,” says Sandesh Kirkire, chief executive officer, Kotak Mahindra Asset Management Co. Ltd.
Banks are also looking at ways to increase their fee-based income by selling insurance and MFs. Typically, a bank earns income from core activities such as giving loans and they also earn fees.
A bulk of its revenue comes from the interest it earns by giving out loans. However, a bank cannot lend all of the money it garners through deposits because they have to keep some capital aside to provide for risky assets
Also, in India regulatory requirements mandate banks to invest 23% of their deposits in government bonds and keep another 4.5% with Reserve Bank of India without earning any interest, which limits funds for lending and hence restricts interest income.
This is also why many private and foreign banks seek more fee-based income such as commissions earned for selling third-party products like MFs.
How does it affect you?
If you are looking for a good adviser who sits with you and plans your financial future, small banks won’t fulfil your need just yet. While banks such as Syndicate Bank, Ratnakar Bank and Federal Bank sound keen to offer MF solutions to their customers, banks such as Saraswat Bank don’t appear to be too keen. “We don’t have such tie-ups. All we do is distribute forms through our branches. We get some fees for it but we consider it as a bonus because the fee income from this is not much,” says S.K. Banerji, managing director, Saraswat Co-Operative Bank.
Further, it’s unlikely that you will find a variety of options at most of these banks as they make available only those fund houses’ forms that they have tied up with. That’ll be about two to five fund houses on average. “This channel requires investment in terms of time, money, people and other resources. This is just what was required in developing the current established channels in the early part of the industry’s evolution. Therefore, they would evolve as an important part of the industry in years to come in reaching out to savers and investors, especially retail,” says Ajit Menon, head (sales and marketing), DSP BlackRock Investment Managers Ltd.
Till then, choose your funds with care if you have an account with any of these banks.