India’s decision to tax returns from fixed-income mutual funds is set to bolster its lenders’ efforts to lure deposits for financing a resurgent credit growth and boost profits. The nation scrapping tax incentives for some debt mutual funds has paved the way for banks to garner as much as $36 billion in deposits from the asset managers, according to Sunil Mehta, chief executive officer of Indian Banks’ Association, a lenders’ lobbying body. The move comes as a respite for the financiers as the widening gap between credit off-take and deposits has sparked risks of asset-liability mismatches and pushed up funding costs.
Rising loan demand from companies and consumers has buoyed annual credit growth to 15.7% as of March, compared to a five-year average of 10.3%, according to Reserve Bank of India data. However, the deposit collection has failed to keep pace and is currently a little more than 10%, pushing bankers to look for ways to lure funds.
Deposit collections by Indian banks have lagged as investors parked funds with more attractive asset classes such as debt mutual funds, which gave better yields owing to the favorable tax regime. With inflation at 6.44% in February, according to the government, real returns on bank deposits, which in most cases is at about 7% annual interest rate for two years, remains low.
The removal of tax incentives on some debt fund investments will place a roadblock for the much needed development of the nation’s bond market, said Niranjan Avasthi, Head-Product, Marketing & Digital Business at Edelweiss Mutual Fund.
Lenders have been raising deposit rates to make them more attractive to customers, posing risks to profits. State Bank of India has increased the interest rates on some deposit plans by more than 100 basis points in the last year, data available on its website shows. “Banks are likely to see a slower rise in the cost of deposits as the increase in deposit rates would be gradual now,” said Karthik Srinivasan, group head – financial sector ratings, ICRA Ltd.