Indian banks are increasingly entering the loan against mutual funds business to target younger, tech-savvy customers who prefer market-linked investments over traditional bank deposits. According to The Economic Times, South-based private lenders such as Karur Vysya Bank and CSB Bank plan to enter this business soon, while South Indian Bank began offering it in March. State-run Canara Bank, which introduced the facility last year, is also looking to scale up the business amid changing savings patterns. Karur Vysya Bank managing director B Ramesh Babu noted that young customers are increasingly holding mutual funds as their primary savings vehicle, stating that 'someone below 35 years, their majority of savings are mutual funds' and that providing liquidity convenience may prevent them from surrendering their market-linked investments.
The facility allows borrowers to raise funds by pledging mutual fund holdings as collateral, helping them avoid premature redemption of investments or costly unsecured personal loans. As reported by The Economic Times, Canara Bank interim managing director Hardeep Singh Ahluwalia noted that while the product is yet to become popular, it is likely to see good traction in a year or two as savers prefer market-linked mutual funds over low-yielding bank deposits. The product is particularly attractive for younger investors who want to maintain their market exposure while accessing liquidity.
Banks are leveraging digital infrastructure to offer the product seamlessly, with the process requiring lenders to mark a lien on mutual fund units with the asset management company. According to The Economic Times, Karur Vysya Bank managing director B Ramesh Babu announced plans to bring out end-to-end digitised loans against mutual funds within one or two months. However, lending against mutual funds is more complex than loans against deposits due to market volatility, with Ramesh Babu highlighting that 'once you mark a lien on that, the margin call is very important because the NAVs will be volatile'. The technological integration is critical for seamless processing across multiple stakeholders.
The Indian mutual fund industry's assets under management have risen nearly six-fold over the past decade to ₹82 lakh crore as of April 30, from ₹14 lakh crore on April 30, 2016, according to data from the Association of Mutual Funds in India. As reported by The Economic Times, the share of equity and mutual funds in annual household financial savings rose to 15.2% in FY25 from 2% in FY12, while the share of bank deposits declined to about 35% from more than 58% over the same period. This shift reflects mass participation in mutual funds and changing investment preferences among younger demographics.
While banks typically offer loans worth 80-90% of deposits, the loan-to-value ratio for mutual funds is around 50%. As reported by The Economic Times, CSB Bank managing director Pralay Mondal stated that the bank will primarily focus on retail and mass affluent customers for lending against mutual funds, which will also help build their liability business. The product is expected to gain popularity as more people invest in mutual funds and seek convenient liquidity solutions without surrendering their market-linked investments, with banks targeting customers who prefer market-linked returns over traditional fixed-income products.
