India's public sector banks (PSBs) have continued to lag behind their private peers when it comes to selling mutual funds (MFs) to investors. Despite having a huge branch network across the country — more than half of which are in the rural and semi-urban regions — state lenders appear not excited to do a serious MF distribution business.
It is worth to note that the MF sector has been attracting a lot of investments from the country's hinterland. The inflows are at historic highs and so is the burgeoning investors' base. However, this is not being adequately captured as a business opportunity by the behemoths of the banking sector.
On the other hand, the private lenders are showing consistent growth in their earnings from MF distribution, year-on-year (y-o-y). It is despite the fact that private banks do not enjoy the vast branch network which their peers in the public sector possess.
For instance, the total earnings of State Bank of India (SBI), Canara Bank, Bank of Baroda (BoB), Punjab National Bank (PNB), Bank of India (BOI) and Union Bank of India (UBI), put together, from MF distribution stood at Rs 223 crore in financial year (FY) 2016-17. In terms of branches, these six banks have nearly 45,000 branches on the collective basis.
On the other hand, private banks like HDFC Bank, ICICI Bank, Axis Bank and Kotak Mahindra Bank (KMB) with a collective branch strength of 14,200 — less than one-third of what state lenders have — earned commissions worth Rs 1,125 crore by way of selling mutual funds.
"This is bizarre, if I may say so. If private players can do, why not we? It is not so that we have not raised these issues with our promoters. Our parent has a great reach and I believe if this is adequately leveraged we can get quite a large flows which will benefit us as well as the industry," says a chief executive officer (CEO) of a fund house sponsored by a public lender.
Banks with country-wide foothold can play a leading and important role in bringing in more investors to the fold of MF. At a time when traditional investment avenues such as banks' fixed deposits, recurring deposits, National Savings Certificates (NSCs), Postal Savings and Public Provident Fund (PPF), among others, are losing attraction given the fall in rate of returns; MFs as investments continue to look attractive from a long-term perspective given their past track records of returns.
It is not so that public lenders have not improved. In percentage growth terms, many have done quite well. But in absolute value, their earnings from MF distribution appear like a drop in an ocean. There is vast room for further improvement. What is worth to mention is that all these public lenders have their own fund houses.
For instance, SBI did quite well in FY17. Its payout from MFs trebled from Rs 62 crore last year to Rs 180 crore in FY17. But given SBI's size and reach, the payout looks minuscule. Similarly, Canara Bank improved from Rs 10.7 crore to Rs 16.5 crore — over 50 per cent growth. But it looks too little given the bank's over 6,000 branches. BoB, PNB and BOI collectively could earn about Rs 17 crore.
Interestingly, in FY17, about 110 individual financial distributors made crores from MF commissions. Several of them earned more than what banks like PNB, BoB and BOI could make.