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Banks Tap Youth with Mutual Fund Loans
Indian banks are expanding their offerings to include loans against mutual funds, aiming to attract younger, tech-savvy customers. These customers increasingly favor market-linked investments over traditional bank deposits. Banks see these loans as a way to offer customers flexible access to funds without forcing them to redeem investments early or take on unsecured debt. Several private banks, including Karur Vysya Bank and CSB Bank, are preparing to launch these services. South Indian Bank has already introduced its offering, and Canara Bank, which began a similar facility last year, plans to expand it.
Digital Processes and Risk Controls
To make these loans accessible, banks are improving their digital platforms for smoother application and disbursement. This involves digital lien marking with asset management companies. Karur Vysya Bank's managing director noted that many individuals under 35 hold savings in mutual funds, making these loans a convenient option for immediate cash needs. However, lending against mutual funds is more complex than against deposits due to market volatility. While deposit-backed loans often have loan-to-value (LTV) ratios of 80-90%, mutual fund loans are typically capped around 50% to account for potential drops in Net Asset Value (NAV). The risk of margin calls in volatile markets is a key concern.
The Shift in Household Savings
The mutual fund industry has grown significantly, with Assets Under Management (AUM) reaching ₹82 lakh crore by April 2026, up from ₹14 lakh crore a decade prior. The Economic Survey 2025-26 highlighted a major shift in household financial savings. Equity and mutual funds now account for 15.2% of annual household financial savings in FY25, a jump from 2% in FY12. In contrast, bank deposits have decreased to about 35% of household savings, down from over 58% in the same period. This indicates that households are taking on more risk and relying more on market instruments for wealth growth.
Strategic Banking Moves
Banks are strategically targeting this segment to diversify their products and attract younger customers comfortable with digital services and market investments. This initiative aligns with the banking sector's broader digital transformation, as institutions invest in technology to enhance customer experience and operational efficiency. Karur Vysya Bank, for example, uses digital underwriting for better risk management and faster lending, with most of its current loan book processed digitally. The bank has improved its Return on Assets (ROA) and shown consistent growth in advances. Its Gross and Net Non-Performing Assets (NPA) have also significantly decreased over the last four years.
Risks of Volatility and Margin Calls
Loans secured by mutual funds carry a significant risk due to the volatility of the underlying assets. A sharp fall in NAVs can lead to margin calls, requiring borrowers to add more collateral or face liquidation of their pledged units. This risk is higher for equity funds compared to debt funds. The LTV ratio for equity funds is often around 50% because of this volatility. If borrowers default, they could lose their investments. While interest rates on these secured loans are typically lower than personal loans, the possibility of margin calls and asset liquidation poses a substantial risk, potentially forcing borrowers to sell assets during unfavorable market conditions. The trend of increasing reliance on market-linked savings, coupled with shrinking net savings and rising household borrowing, raises concerns about overall financial stability. CSB Bank's managing director noted that while mutual fund penetration is growing, the bank will focus on retail and mass affluent customers, indicating a cautious approach to risk.