Although considered to be generally safe, many banks have frozen depositors’ money because of weak financials. Private sector and cooperative banks are considered more vulnerable, but even IDBI was headed for trouble before LIC was made to buy it out. Clearly, interest rates on your bank fixed deposits are not the only criteria for an investment.
Every once in a while, we hear about bank depositors’ money being at peril because something went wrong. Inevitably, the accusatory finger points towards the regulator and the government.
To be sure, the “system” has a responsibility, but every stakeholder has one too, and that includes the depositor as well.
In this case, ‘responsibility” of the depositor means understanding what s/he is getting into, what is the risk, and if something goes wrong, who is supposed to carry the loss.
This is important, because we tend to get swayed when we see the board of a “Bank” written in big fonts hanging outside a branch office.
As an anecdote, reportedly, the scam at Punjab and Maharashtra Cooperative Bank (PMC) did not spare even people at the Reserve Bank of India.
eportedly, the Reserve Bank Officers’ Cooperative Credit Society Ltd, with approximately 3,500 members, had a fixed deposit of ₹105 crore with PMC. Moreover, the Reserve Bank Staff and Officers Cooperative Credit Society Ltd, with about 8,300 members, had ₹86.50-crore in fixed deposits.
Safety has gone up, but is it enough?
The “system” has improved, in terms of providing safety to depositors.
Under the Deposit Insurance and Credit Guarantee Act, the insurance coverage is now Rs 5 lakh, increased from Rs 1 lakh earlier. Earlier, the payment of compensation to depositors would have to wait until the liquidation of the bank, which can take years at a court of law.
According to the Financial Stability Report released by the Reserve Bank of India on December 29, 2022, “the number of registered insured banks as on September 30, 2022 stood at 2,034 comprising 141 commercial banks and 1,893 cooperative banks. With the present limit of deposit insurance at ₹5 lakh, there were 267.1 crore fully protected deposit accounts (98.0 percent of total) as at end-September 2022. In value terms, the insured deposits of ₹80.95 lakh crore formed 46.2 percent of the total assessable deposits.”
A simple interpretation of this implies that in terms of number of accounts, it covers 98 percent of the universe of bank depositors. However, in terms of money value, this covers a little less than half (46.2 percent) of deposits. More than half the deposits are uninsured, being more than ₹5 lakh i.e. beyond the eligible threshold.
The responsibility mentioned earlier pertains to this set: 2 percent in terms of number of accounts, but more than half in terms of value. From a macro perspective, there has to be equitability in any compensation. Whenever there is a banking accident, there is an expectation that the system should provide compensation, even beyond the ₹5 lakh threshold.
However, if that were to happen (it has not happened so far, just for the sake of argument) it would come from the pool of money with the government. This pool of money ultimately belongs to taxpayers. And taxpayers include people who are keeping their money in safer banks offering relatively lower rates of interest. In other words, it includes people who did not enjoy the relatively higher rate of interest offered by the defaulting bank.
In search of the safest bank
The safety of your bank deposits should not be seen in terms of the insurance coverage only. When you are opting for the simplest and most basic of investment options, you should have peace of mind. Public sector banks are safe.
Though it is not a stated guarantee, it is an implied responsibility of the Government. In case something goes wrong, the Government steps in and finds a solution. When IDBI Bank was going belly up with huge Non-Performing Assets (NPAs), LIC was made to absorb the pain. The move was debated because arguably LIC’s money belongs to policyholders. However, deposit-holders’ money was safe.
After PSU banks, comes leading private sector banks. When Yes Bank was facing high NPA issues, leading banks of our country were asked to take a stake and provide the capital and leadership to tide over the crisis.
There is a concept of Too Big To Fail (TBTF) – when a bank of big scale is in trouble, which may endanger the entire financial system, the overall system steps in to the rescue. There are many cooperative banks which go under, ‘used’ by their promoters running up huge NPAs, but these are not TBTFs.
As per the Financial Stability Report released by the RBI on December 29, 2022, the gross NPAs of scheduled commercial banks (the leading banks) is 5 percent and the net NPAs (post setting aside provisions in the books of accounts) are only 1.3 percent. The gross NPAs of Urban Cooperative Banks (UCBs) is 12.7 per cent within which, Gross Non-Performing Assets (GNPAs) of non-scheduled UCBs is 15.8 percent. NPAs of rural non-scheduled UCBs would be even worse.