HOW SAFE IS YOUR BANK DEPOSIT?

A look at the measures the Reserve Bank and the government have taken to keep your money safe

The recent crisis at the Punjab and Maharashtra Cooperative (PMC) Bank and others like it has made many people worried. Suddenly, the safety of bank deposits has become a issue. What will happen to their money if a bank goes bust?

➘ HOW REGULATION WORKS FOR BANKS

The prudential regulatory requirement is the same for all commercial banks, including PSU banks, private banks, small finance banks and regional rural banks. They cannot lend the entire money that they have received from depositors; 4 per cent of these deposits has to be kept aside as cash reserve ratio (CRR) and 18.75 per cent as statutory liquid ratio (SLR). There is also a capital adequacy ratio, or the capital-torisk weighted assets ratio (CRAR), which is used to protect depositors (it is currently at 9 per cent). All commercial banks are subject to regular internal and external audits to guard against any major problem going undetected for long. These mechanisms are in place to help banks meet any adverse scenario.

➘ ARE PSU BANKS SAFER THAN PRIVATE BANKS?

Traditionally, banks in India have enjoyed a high level of trust with depositors. The safety perception is generally higher for public sector banks (being “government banks”). “There is a general perception that PSU banks may stand a higher chance of being salvaged by RBI than private banks,” says Sousthav Chakrabarty, cofounder and CEO of SEBIcertified financial advisory firm, Capital Quotient. “In recent times, the RBI has drawn up a list of systemically important banks (SIBs) which are too important for the Indian economy. If such banks do fail, the RBI will step in to provide salvage options and protect deposit holders. Many of the large private banks are now part of this list.” Currently, public sector bank SBI and two private sector banks, HDFC Bank and ICICI Bank, are in the RBI’s list.

However, this does not mean the central bank will not act to save the smaller players. Be it a private or public sector bank, no Indian government or the RBI would like to be in a situation where a bank goes bust on their watch. Whenever the central bank identifies a major issue with a bank, it brings it under prompt corrective action as it did in the case of the Lakshmi Vilas Bank. If the situation does not improve, then the RBI usually facilitates a merger with a strong bank. In the recent past, the RBI did the same when there was a crisis with Global Trust Bank (a small private bank) by merging it with the Oriental Bank of Commerce, a PSU bank.

“At the end of the day, if there is a banking collapse arising from uncontrolled defaults, both private and public sector banks will be subject to the actions of the central bank in terms of a salvage plan. At the time, whether it’s a merger

or a takeover, the risks for deposit holders are the same,” says Chakrabarty. Of course, it pays to be cautious. “Safety levels among banks differ based on their financials. Banks with higher NPAs and lower capital adequacy ratio should be avoided,” says Mrin Agarwal, financial educator, money mentor and founder of Finsafe.

➘ IS YOUR MONEY SAFE WITH A COOPERATIVE BANK?

All commercial banks, be it public sector or private sector, are governed directly by the RBI. But when it comes to cooperative banks, they have dual regulation. Besides the RBI, they are also regulated by the respective registrars of central or various state cooperative societies under which they are registered. “Lack of corporate governance and professionalism are the main reasons for the weak health of cooperative banks,” says Naveen Kukreja, CEO and co-founder, Paisabazaar. com. “Dual regulation also allows urban cooperative banks (UCBs) like PMC Bank to escape detection of irregularities. Cooperative banks don’t have professional boards as their board of directors are directly elected by the bank’s members. Also, unlike commercial banks, co-op banks do not require the RBI’s approval while appointing a chief executive.”

“As far as the regulation of these banks is concerned, the RBI regulates the usual banking functions whereas the Registrars of Cooperative Societies regulate the administration and audit of these banks,” adds Kukreja. This dual control leaves some loopholes in the regulatory framework. The recent crisis at PMC Bank will hopefully be a wake-up call for government authorities. The finance minister has reiterated that the ministry will make changes in the rules to plug the regulatory loopholes. If that happens, we may see better regulation of cooperative banks.

➘ DEPOSIT INSURANCE COVER FOR ALL

In a worst-case scenario, when the RBI and the government of the day fail to find any resolution and a bank goes bust, then depositors have deposit insurance as a final safety mechanism. Almost all banks have this facility where depositors are covered under a deposit insurance cover of Rs 1 lakh which can include both principal and interest.

“In the event of a bank failure, this insurance covers bank deposits of up to Rs 1 lakh, including fixed, savings, current and recurring deposits of every depositor. There is no difference in the level of safety of deposit in any kind of bank included and covered under the Deposit Insurance

and Credit Guarantee Corporation (DICGC),” says Kukreja. The DICGC is a wholly owned subsidiary of the RBI whose sole purpose is to provide insurance cover to deposits and guarantee credit facilities.

However, there are ways in which you can enjoy higher deposit insurance cover. You can divide your deposit and keep it in different banks; also divide your deposit in the same bank in different accounts, held in different rights and capacities. For instance, hold the account as an individual, or a joint account holder, a partner of a firm, a director of a company or guardian of a minor. All these accounts will then separately be eligible for Rs 1 lakh insurance cover each.

➘ RAISE THE COVER

Till 1993, the deposit insurance cover was regularly enhanced. But not for the past 26 years. Many have raised concerns about how the Rs 1 lakh insurance cover is inadequate. “Given that only 28 per cent of deposits are insured, and India has the lowest deposit insurance cover in the world, there is an urgent need to raise the cover. A recent report by the SBI has recommended doubling the cover with a separate cover for senior citizens,” says Mrin Agarwal. The government will hopefully take note and raise the cover keeping in view inflation and the need for a higher safety net for marginal depositors. ■

THE DUAL CONTROL NORMS FOR COOPERATIVE BANKS LEAVE LOOPHOLES IN THE REGULATORY FRAMEWORK