Attract savings of low-income groups from rural areas: RBI to MFs

The Reserve Bank of India (RBI) has asked the domestic mutual fund industry to come up with appropriate schemes to attract the savings of low-income groups especially in the rural areas of the country. The Central Bank said that despite having a long history, the fund industry has assets less than 10 per cent of the country’s GDP.

Subir Vithal Gokarn, deputy governor of RBI, said, “Role of mutual funds in promoting saving at this point continues to be insignificant in India. Attracting low-income groups is the only way to ensure participation of all categories (of investors) in the financial market as mutual funds clearly have a role in financial development.” He was speaking at the 7th Mutual Fund Summit of Confederation of Indian Industry (CII).

He further stated that RBI regulates money markets, Government Securities and the foreign exchange market. “Mutual funds have presence in the first two and therefore RBI is interested in the role MF play. Mutual Funds have played an important role in broadening and deepening the money market and to some extent the Government Securities (GILT) market,” Gokarn added.

The deputy governor said that the money market oriented MFs witnessed a phenomenal growth. However, “GILT funds have registered a moderate growth. AUM under GILT is less than half a per cent of the aggregate assets. Role of MF in the government securities market is not very encouraging,” he said.

The average holding in G-Sec by MF was 0.64 per cent over the last two years. “One possible reason for low holding of MF in the G-Sec market is the lack of investors’ interest in the GILT funds due to significant interest rates risk,” added Gokarn. But he stressed that there was a need for the mutual funds especially the gilt funds to promote retail holding in G-Sec.

The deputy governor once again pointed out the potential of systemic instability due to circularity of funds between the banking system and the mutual funds. “The relationship between banks and mutual funds has been of regulatory concerns and we tried to address the issue through some kind of capping,” he said.

RBI, in its monetary policy on May 3, had announced that banks’ investment in debt oriented mutual funds be capped at 10 per cent of their net worth. The RBI did not completely shut down the channel but ensured that the exposure does not go to a certain point where the system will come under stress, Gokarn added.