Take it or leave it, mutual funds (MFs) are out to poach on bank deposits.The coming few years will show how exactly the jungle mentality of thesefunds will impact banks. Increasingly, many bank depositors are beginning torealise that investments in savings accounts are as good as locking theirmoney in a closet. You seldom get inflation-adjusted positive returns onbank deposits. The general public has also begun associating banks withcrises, with terms like non-performing assets gaining public currency. Theold "safety-first" psychology of depositors is now open to question.Banks also realise this. In recent years, they have begun moving out oftheir traditional roles as lenders, both to reduce risks and to improvefee-based incomes. The weak banks may even be asked to focus on "narrowbanking," by keeping deposits in gilts or some other assets, which willlower their risks and improve liquidity.
But viewed from the depositor's perspective, the basic question remains.Will all this improve returns on savings accounts and, if so, to whatextent? Many investors are now thinking of directly putting their funds ingilt funds which carry low risks and higher returns. A low expense ratiowould be among the side-benefits.
All this means that banks and MFs both face a future full of thrills, chillsand pills. While the banks will adopt a route that takes them closer tofee-based income, including fees from managing other people's funds, the MFswill be looking for solid performance that will change in bias of investorsfrom "safe" deposits to "liquid" asset-growth.
Banks are not going to be out of business anytime soon. Their role asintermediaries can never be ignored. It is just that MFs are beginning tocatalyse a sea change in the way banks do business.
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.