The Yes Bank crisis has led many to wonder out loud if their money with any bank is actually safe. To put their mind at ease, and to help them keep their money safe, here are some observations.
Lately, there’s been a spate of interventions by the Reserve Bank of India. The central bank has had to step in often to prevent runs at banks gripped by NPA-related problems. The day before yesterday, it was announced that the RBI had to step in to replace the board of directors at Yes Bank. The central bank also announced that Yes Bank customers can only withdraw up to Rs 50,000 from all their savings and deposit accounts with the troubled bank. This has led many to wonder out loud if their money with any bank is actually safe. To put their mind at ease, and to help them keep their money safe, here are some observations.
Your Money Is Guaranteed By DICGC
Firstly, your deposits up to Rs 1 lakh in any combination of savings and deposits with any commercial bank are insured by the Deposit Insurance and Credit Guarantee Corporation, which is an RBI subsidiary. So if your bank – whether commercial or cooperative – goes under, your money up to Rs 1 lakh is safe. Moreover, this limit is being hiked to Rs 5 lakh from April 1, following the announcements to that effect by Finance Minister Nirmala Sitharaman in her Union Budget 2020 speech. Therefore, your savings and deposits up to Rs 5 lakh will be insured by the DICGC. This limit would cover a very large majority of the savings and deposit accounts with commercial and cooperative banks in India. This still places the onus on large deposit holders to manage their risks.
Understand Your Banking Risks
Next, let’s understand that there’s no such thing as risk-free banking. There’s some kind of risk – whether large or small, seen or unforeseen – in every form of savings and investment. While the government as well as the regulator provide you some safety nets, the onus is on you as a customer to understand the risks associated with any form of banking. Banks, like any business, have their ups and downs, and some banks may be more vulnerable than others. Therefore, ensure that you’ve not reliant completely on any particularly vulnerable banks.
Pay Attention To Bank’s Activities
It’s not enough to trust your bank with your money. As an aware depositor, you must pay attention to the goings-on at your bank. Is it in the news? Why was it in the news? How much are its NPAs? Who are the bank’s biggest stakeholders? Who are its biggest borrowers? Is it profitable in recent quarters? If not, what were the reasons for and the extent of its losses? How is its share price performing? How does it compare to its peer banks? How is the corporate governance at the bank? Have there been instances of fraud at the bank? When you walk into your bank branch, what do you learn from the bank’s employees? These are just a few things to keep in mind while evaluating your bank’s stability.
Diversify Your Banks
Like your investments, you should also diversify your banks so that you don’t have all your money tied to any one bank. Based on an assessment of your bank’s risks, you may divide your holdings among multiple banks. You are likely to find that the large banks – especially the government-owned ones – are likely to be stabler, as will be the large private banks. If you’re banking exclusively with small banks and cooperative banks, you should hedge your risks by shifting some part of your savings to larger banks. If you’re a senior citizen reliant on interest income from deposits, it would be especially important for you to secure your money. For example, you could shift at least part of your holdings into small savings schemes such as the Senior Citizens Savings Scheme, a government-backed investment plan that provides guaranteed returns of 8.6% per annum. This way, you can spread your savings across multiple stable banks and investment schemes and get higher returns on your deposits.
Higher Returns Mean Higher Risks
There are several banks that offer 1-2% higher in terms of deposit interest rates. Some small banks still offer 8.5% to 9% on their deposits. While availing any high-returns deposit schemes, evaluate your risks. Small banks may be less stable compared to the large, well-established and government-owned ones. If you wish to take an exposure with these banks, it would be wise to limit the exposure to the point where you won’t feel the pinch in case the bank were to undergo a crisis.
It’s best to spread your savings across multiple banks and to keep an eye on the on-goings there to ensure your banks are stable and your money safe. Large banks are your best bet, and you can consider reducing your holdings in small banks where the risks could be high.
(The writer is CEO, BankBazaar.com)