PSU banks have not been active in selling mutual funds due to low margins.
Market regulator SEBI, in its long term policy for mutual funds, has proposed that public sector banks should take active part in distributing mutual fund products.
“Apart
from traditional banking products, PSU banks have recently been very successful
in distribution of third party insurance products. However, the same success is
not reflected in the case of mutual funds. All PSU banks may be encouraged to
distribute schemes of all mutual funds,” stated SEBI.
PSU banks have been actively selling insurance products due to their high commissions. However, low commissions on mutual funds has deterred these banks to take up MF distribution in a big way.
The
disinterest is evident from the low commissions earned by these banks from
AMCs. PSU banks earned Rs. 80 crore by selling mutual funds. Out of this, SBI
earned Rs. 36 crore or 44% of the total commissions earned by PSU banks. In
FY2012-13, State Bank of India, the largest distributor of mutual funds, had
assets under advisory of Rs. 10,535 crore. The second largest distributor among
PSU banks is IDBI Bank which earned a commission of Rs. 10 crore, followed by Union
Bank of India (Rs. 7.60 crore) Canara Bank (Rs.7 crore) and Bank of Baroda (Rs.
3 crore).
There are 21 PSU banks in India and all of them already sell mutual funds.
In comparison to PSUs, foreign and private banks have been very active in wealth management space. For instance, Citibank was the largest mutual fund distributor, having earned Rs. 165 crore as commissions in FY12-13, followed by HDFC Bank (Rs. 160 crore).
Fund officials do not expect PSU banks to take up mutual fund distribution in a big way unless there is a strong incentive.
“They are struggling to get deposits from customers. Some PSU banks help mobilize money in their own mutual funds. We don’t expect much business from PSU banks,” said a CEO of a mid-sized fund house.
Apart
from low commissions, fund officials say that PSU banks see a threat from debt
funds which compete with fixed deposits. “Mutual funds are new products for
these banks. It will take some time for these banks to get active in MF
distribution. The returns from mutual funds have also not been very attractive
over the last five years. They say it becomes difficult to justify to their
customers if funds don’t perform well. Also, commissions on mutual funds are
not very attractive,” says Debasish Mallick, Managing Director & Chief
Executive Officer, IDBI Mutual Fund.
Compared to private banks that are more active in
MF distribution in metros, PSU banks provide reach in semi-urban and rural
areas to AMCs. Most fund officials feel that PSU banks provide a huge potential
in the times to come. Additionally, customers have a good connect with the
branch officials of PSU banks.
Distributors,
however, caution that adequate safeguards must be deployed to ensure that banks
don’t end up mis-selling products.
To attract distributors from hinterland, SEBI has allowed AMCs to charge a higher total expense ratio (TER), based on certain conditions, if they receive inflows from B-15 cities. The higher TER is used to offer higher commissions to distributors who bring applications from small cities. It remains to be seen if this incentive will spur PSU banks to take up mutual fund distribution more aggressively.
