Net inflow to debt mutual funds shrinks Jan 15, 2010

Net inflow to debt mutual funds shrinks

Jan 15, 2010

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Weekly change as on Jan 14, 2010

Net inflow to debt mutual funds shrinks

Impact

(Source: SEBI)

The net investments in debt mutual funds have witnessed contraction in the month of December 2009. The gross purchases stood at Rs 54,343.30 crore, whereas the gross sales stood at Rs 52,122.20 crore, thus making net investments of Rs 2,221.10 crore.

The contraction was mainly on account of:

Redemptions by companies to meet their advance
tax commitments
Banks pruning their investments to comply with
capital adequacy norms
Banks, following the directive of the Reserve Bank of India (RBI), to trim their exposure to mutual funds

This is the second time after September 2009 that the industry has witnessed this in debt mutual funds.

Fund managers are however hopeful that corporate money withdrawn for tax purposes may soon find its way back, but they are not as confident about the bank funds.

We feel that this shrinkage is temporary and is for reasons that should not dampen the long-term investing spirit of investors.

Bank charges to be capped

Impact

After facing a rising number of customer complaints on excessive charges, the Reserve Bank of India (RBI) has asked Indian Banking Association (IBA) to come up with guidelines on what reasonable charges should be for basic services.

This may thus lead to banks capping charges on basic services such as:

Issuing a demand draft
Cheque return charges
Issuing cheque books
Non maintenance of prescribed minimum balance
Stop-payment instructions
Remittances
Reviving inoperative accounts
Issuing duplicate pass books

AT PRESENT FEW BASIC SERVICE CHARGES

Service	SBI (Rs)	ICICI Bank (Rs)	Citibank (Rs)
Issuing Demand Draft	30 onwards	50 onwards	150 onwards*
Cheque return (outward)	75	100	100
Cheque return (inward)	75	350	350
Setting up standing instructions	50	150	NA
Min balance penalty	100 to 200/quarter	750/quarter	250/month
Stop Payment	50 onwards	50 onwards	50 onwards**
New cheque book/leaves	2/leaf	Nil for 30 leaves in a quarter; 30 for every additional cheque book with 15 leaves	1-2/leaf

(Source: Bank websites)
*Issued through branches,
** Free if instructions given online
Note: The above list is not exhaustive.

In order to issue guidelines, the industry lobby has asked its Committee for Customer Service, headed by Standard Chartered Bank CEO, Mr Neeraj Swaroop, to submit a report to RBI. The report is expected to be submitted next month, and if RBI accepts it, the guidelines will come into effect from April 1, 2010.

We believe that such a move to cap charges on basic services offered by banks will rationalize some of the current charges being levied and lead to savings for individuals.

Cutting bank’s insurance commission

Impact

The Insurance Regulatory and Development Authority (IRDA) may cut commissions charged by banks for selling insurance policies to customers through their branches. The IRDA has also submitted a proposal to the law ministry, seeking powers to regulate commissions on insurance policies sold through different channels.

Currently all distribution channels i.e. agents as well as bank branches, charge uniform commissions. Also, section 40 of the Insurance Act, 1938 does not allow distributors to offer rebates to or charge more from any policyholder. Hence in order to define the path for differential commission structure, this section would be removed from the Act and brought under the IRDA’s purview.

We feel that the move may impact the sales of insurance companies and also the insurance commission income of banks. For the investors it will offer relief, since they will have to pay much less whilst buying an insurance policy from banks.

INTERVIEW

In an interview with The Hindu Business Line, Mr. A.P. Kurian, Chairman of Association of Mutual Funds in India (AMFI) expressed his views on challenges ahead for mutual funds in 2010. He believes that there is tremendous potential as well as major challenges. He said "potential comes from the inherent strengths and sustained interest by foreign and domestic funds as well as common investor. The challenges lie in maintaining the interest of all participants, especially the retail segments".

On the retail segment, he expressed the view that the assets of individual investors, including HNIs, virtually saw no redemptions during the recession, which shows that Indian investors have come of age. Investors are no longer panicking. However he believes that the challenges lie in the case of individual investor accounts. While there has been a cent percent growth in debt funds, growth in equity funds has fallen by 50 percent. This is mainly on account of the paradigm shift in the process of selling these products.

AND OTHER NEWS...

Food inflation eased to 17.28% for the week ended January 2, 2010. Whereas the broader price index as measured by the Wholesale Price Index (WPI) touched a 13-month of 7.31% in the month of December 2009.

Bajaj Allianz Life Insurance launched a Unit linked Insurance Plan (ULIP) named ‘Shield Plus’ which offers a minimum guarantee of 170% at maturity. The policy is a single-premium life insurance policy having a fixed term of 10 years and a minimum premium requirement of Rs 25,000.

The Index of Industrial Production (IIP) hit a two year high in November 2009. The IIP grew 11.7%, primarily due to growth in the manufacturing sector, fuelling a debate on withdrawal of fiscal and monetary stimulus measures.

The Insurance Regulatory and Development Authority (IRDA) mentioned that it will consider capping the charges on traditional products, subject to the experience in capping Unit Linked Insurance Plans (ULIPs) charges.

Ms. Usha Thorat, Deputy Governor of RBI expressed concerns over teaser home loan rates. Ms. Thorat said "banks must ensure that borrowers are aware of the implications of such rates and the appraisal takes into account the repaying capacity of borrowers when the rates become normal".

The banks are likely to ask RBI to lower interest rate on saving account in order to enable them to comply with the new directive requiring interest rates on these accounts to be calculated on daily balances, effective April 2010. Presently, banks calculate interest at 3.5% p.a. on the average amount that is maintained from the tenth to the last day of the month.

From February, consumers will have to pay more for electricity charges, since the Maharashtra Government on Tuesday hiked the electricity duty for all residential, industrial and commercial consumers. Monthly electricity bills will reflect 15%, 9% and 17% electricity duty for residential, industrial and commercial consumers respectively. Currently, consumers are charged 12%, 6% and 13% of their total monthly bill as electricity duty

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