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Credit concerns spook savers over bank safety

Credit concerns spook savers over bank safety
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First Published: Tue, Oct 14 2008. 11 10 PM IST
Updated: Tue, Oct 14 2008. 11 10 PM IST
Mumbai: Housewife Sumathi Govindaraj has had an account at ICICI Bank Ltd, India’s second biggest lender, for four years. Last week, she transferred her life’s savings of more than Rs2 lakh to state-run Indian Bank after hearing rumours that ICICI Bank could be in trouble.
The mother of two from the southern city of Coimbatore, Tamil Nadu, thought her money would be safer at a government institution. She didn’t know that deposit holders at all Indian banks get the same official guarantee: Rs1 lakh per account.
“I moved all my money thinking it is all safe; how is it that only Rs1 lakh is insured?” asked Govindaraj, 36. “The only option seems to be to put the money in a pot and bury it in the backyard.”
Savers, spooked by concerns the global credit crunch may squeeze Indian lenders, are demanding the government increase deposit insurance, which was last raised in 1993.
In the past five years, household savings in India nearly doubled to Rs9.85 trillion as the country’s economy boomed. Indian officials haven’t followed their counterparts in Europe, the US and Australia in raising guarantees, arguing that the nation’s banks are sound.
“Investors are panicking,” said P.G.R. Prasad, an adviser at Bangalore-based Wealth Solutions Pvt. Ltd, which provides financial services to companies. “It doesn’t make any difference whether it is in a public sector bank or a private sector bank—deposits aren’t fully guaranteed.”
On 30 September, the Reserve Bank of India (RBI) released a statement saying ICICI Bank was “well capitalized” and had sufficient funds to meet depositors’ needs after media reports about the Mumbai-based bank’s financial position led some customers to make withdrawals. ICICI Bank chief executive officer K.V. Kamath said the speculation was “baseless and malicious”.
Words may not be enough to calm consumers, said Yashwant Sinha, a lawmaker from the opposition Bharatiya Janata Party, who served as finance minister in the previous government. “It’s no comfort for people who have larger sums of money,” he said. “There is a case for increasing” deposit insurance.
In 1962, India became the second country after the US to insure deposits following a series of bank failures, according to the central bank’s website.
Deposit Insurance and Credit Guarantee Corporation, owned by RBI, increased the insurance limit to Rs1 lakh in 1993. Since then, insured deposits have risen almost 11-fold to Rs18 trillion, according to the agency’s annual report. The number of accounts increased to 1.03 billion from 354.3 million.
The limit could be raised if savers paid a premium to insure deposits beyond Rs1 lakh said Prakash G. Apte, one of nine board members at the Deposit Insurance and Credit Guarantee Corp.
“There’s no way (the) government could provide free insurance to all this,” said Apte, professor of economics and social science at the Indian Institute of Management, Bangalore. “Start charging an insurance premium and any amount can be insured.”
Sanjay Shah, a 34-year-old executive at a plastics maker in Baroda, last week shifted his personal account to State Bank of India from ICICI Bank. He said the cap should be raised to Rs15 lakh per account.
“If that doesn’t happen, I will open multiple accounts in multiple banks,” he said.
Such concerns are unfounded, said Sujan Hajra, chief economist at Mumbai-based Anand Rathi Securities Ltd. “We haven’t had an incident for decades where a depositor was not saved during bank failures,” he said.
Since 1969, the government hasn’t allowed any bank to fail, merging 31 troubled lenders with stronger, mostly state-run, institutions to protect deposits, according to the central bank. Most recently, IDBI Bank Ltd acquired the unprofitable United Western Bank in 2006.
There’s no need to increase deposit protection, said M.S. Sundara Rajan, chairman of Indian Bank, the nation’s 10th largest by market value, because domestic lenders aren’t short of cash like their overseas counterparts.
“You need high insurance only when you are driving rashly and there’s a possibility of an accident,” Rajan said. “Our banking system is rock solid.”
Even so, India has taken action to boost liquidity. On 10 October, the central bank injected about Rs60,000 crore into the financial system by cutting the cash reserve ratio, the amount lenders must store with the bank, to 7.5% from 9%. A day later, central bank governor D. Subbarao told a meeting of the International Monetary Fund in Washington that the “efficacy and coverage” of deposit insurance was a relevant issue. That’s the only comment the bank has made on the subject.
Governments from the US and UK to Australia and New Zealand raised protection levels to prevent bank runs as the financial system teetered near collapse after global losses of more than $630 billion (Rs30 trillion) linked to US subprime mortgages.
Indonesia on Monday increased its deposit guarantee 20-fold to 2 billion rupiah ($204,000) per individual.
Increased protection for individual investors is only fair, said R. Kalyanaraman, a director at IMNC Logistics Pvt. Ltd in Navi Mumbai. He doesn’t invest in stocks, mutual funds or real estate because he thinks it’s too risky.
“When I don’t gamble for high returns, the government should ensure that all my money with banks is safe,” said Kalyanaraman, 42, who has more than Rs5 lakh deposited. Housewife Govindaraj agrees. “It is going to be tougher on old people than me,” said Govindaraj. “Retired people want safety and they don’t want to rely on their kids’ income.”
Tuhin Kar in Mumbai contributed to this story.
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First Published: Tue, Oct 14 2008. 11 10 PM IST
More Topics: Credit | RBI | ICICI Bank | Investors | Insurance |