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The latest story that is spooking bank depositors is the moratorium on their money in Lakshmi Vilas Bank, ahead of its amalgamation with DBS Bank
PremiumIndian households looking for a safe space to put their money have been going from crisis to crisis in the past few years. Banks have failed, debt funds saw deep losses, and in March 2020, we saw six debt funds frozen. Even people who trusted nobody and kept cash under the mattress lost it during demonetization.
The latest story that is spooking bank depositors is the moratorium on their money in Lakshmi Vilas Bank (LVB), ahead of its amalgamation with DBS Bank. LVB is a small bank and the impact on overall banking will be marginal, but the loss of confidence in banking escalates with every crisis. And banking is all about the trust that your money will be there when you need it. Households must understand the difference between their avatars as depositors and shareholders. RBI has moved fast to announce that no depositor will lose money, that it will be available post the moratorium. The fixed deposits will be safe—the rates may change as DBS as the new owner will decide this. The losses will go to the shareholders. The share values are slated to go to zero.
There is no contagion to other banks. This is a crisis well-managed, like the earlier Yes Bank one. Shaken savers need to only look at the history of banking to understand that depositor money in scheduled commercial banks has not been lost. Your bank is safe as a custodian of your deposits. So, ignore WhatsApp forwards that tell you to exit banks. However, investors in shares of banks, and into bonds, need to understand the risk. A bank share and a bank deposit are different instruments. Don’t get mauled by the risk if you don’t understand it.
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