MFs engage PSBs to reach out to smaller cities

The race to reach the hinterland is on. In the one month since the Securities and Exchange Board of India (Sebi) dangled the additional 30-bps expense ratio carrot to mutual fund houses for expanding beyond the top 15 cities, at least six MFs have entered into distribution partnerships with public sector banks to distribute their schemes in Tier-II and Tier-III cities.

Birla Sun Life Asset Management, HDFC Mutual Fund and IDBI Asset Management have announced a tie-up with Syndicate Bank to sell their schemes through the bank?s branches. SBI Mutual Fund has entered into an alliance with Ratnakar Bank, while Peerless MF has joined hands with Allahabad Bank.

Reliance Capital Asset Management (RCAM) announced a distribution tie-up with Indian Overseas Bank (IOB).

Tie-ups among MFs and PSU banks are nothing new, but the Sebi guidelines seem to have provided a new fillip.

?Most PSU banks have a large branch network in small cities and fund houses have realised that it will be difficult for them to reach out to these regions without activating the banking distribution channel of these banks,? said an official with a mid-sized fund house on condition of anonymity. For instance, both Syndicate Bank and IOB have over 2,600 branches across India.

The official added that it will be easier for fund houses to tap the existing customers of these banks rather than reaching out to new investors. ?We see a huge untapped potential in the Tier-I and Tier-II cities in India. Our partnership with banks will help us reach out to investors in smaller towns and cities and facilitate the banks to offer a complete set of financial products to their customers?, said Sundeep Sikka, CEO, RCAM.

The banks, for their part, are looking to augment their fee income through such tie-ups. MG Sanghvi, chairman and managing director of Syndicate Bank, said the tie-ups will help provide customers a wider range of investment options other than the regular banking products. It will also allow the bank to cross-sell products and help augment its fee-based income, he added.

Sceptics, however, point out that it won?t be easy for PSU banks to sell MF products. ?Most PSU banks are not comfortable with the concept of aggressive selling, which is required for selling a push product like mutual fund,? said the MF official quoted earlier.

He cautioned that banks could end up selling the wrong product to customers, which is why the bank staff will have to be adequately trained about the products. The fear that MF investments could eat into the fixed deposit corpus could also dissuade bank staff from pushing MF products, say experts.

In its recent circular, Sebi allowed fund houses to charge an additional 30 bps of the total expense ratio (TER) for going beyond the top 15 cities on the condition that the new inflows from beyond top 15 cities are at least 30% of the gross new inflows in the scheme or 15% of the average assets under management (year to date) of the scheme, whichever is higher.

However, the additional TER will be clawed back if the inflows from beyond top 15 cities are redeemed within a period of one year from the date of investment.