Banks eye loans against mutual funds to tap young customers

South-based private lenders such as Karur Vysya Bank and CSB Bank plan to get into 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.

“Loan against mutual funds is yet to become popular. But with savers preferring market-linked mutual funds, this product is likely to see good traction in a year or two,” Canara Bank interim managing director Hardeep Singh Ahluwalia said.

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.

“Youngsters are sitting on the mutual fund now,” Karur Vysya Bank managing director B Ramesh Babu said. “Someone below 35 years, their majority of savings are mutual funds. So if they are given this sort of a convenience for their urgent liquidity needs, they may not be willing to surrender or redeem those mutual funds, as they may incur a loss.”

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“We are bringing out end-to-end digitised loans against mutual funds, maybe in another one or two months,” he said.
Banks are leveraging digital infrastructure to offer the product seamlessly. The process requires lenders to mark a lien on mutual fund units with the asset management company, making technological integration critical.Lending against mutual funds is, however, more complex than loans against deposits because of market volatility. While banks typically offer loans worth 80-90% of deposits, the loan-to-value ratio for mutual funds is around 50%.

“Once you mark a lien on that, the margin call is very important because the NAVs will be volatile,” Ramesh Babu said.

Assets under management of the Indian mutual fund industry have risen nearly six-fold over the past decade to Rs 82 lakh crore as of April 30, from Rs 14 lakh crore on April 30, 2016, according to data from the Association of Mutual Funds in India.

The share of equity and mutual funds in annual household financial savings rose to 15.2% in FY25 from 2% in FY12, according to the Economic Survey 2025-26. In contrast, the share of bank deposits declined to about 35% from more than 58% over the same period.

“Today the kind of penetration, which is happening in mutual funds, reflects mass participation, but we will primarily focus the retail and mass affluent customers for lending against mutual funds and they will also help us in building our liability business,” CSB Bank managing director Pralay Mondal said.