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How to make your bank deposits safer

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  • Never have all your savings in one bank account. This is the most basic point
  • A prudent way of dealing with this is to stay away from banks with a high rate of bad loans. Anything over 10% is a no-no. You can easily find the bad loans rate of your bank by Googling it

Over the last few years, more than a few cooperative banks have ended up in trouble. Yes Bank, a scheduled commercial bank, also got into trouble and had to be rescued. A few public sector banks have also not been doing well.

In this scenario, many people who have a bulk of their savings in bank deposits wonder whether their bank deposits are safe.

This is a wrong question to ask. As an outsider, you can never know for sure whether your bank is safe or not. Hence, the question to ask should be, how can I make my bank deposits safer. How can I make sure that my savings remain accessible to me at any point in time?

And there are fairly simple ways of doing that.

1) Never have all your savings in one bank account. This is the most basic point.

When the Punjab and Maharashtra Cooperative (PMC) Bank was put under a moratorium by the Reserve Bank of India (RBI), in a lot of stories that came out on the social media, people had put all their savings in this one bank and were stuck. Due to this, marriages that had to happen got cancelled. People who had to undergo surgery, had to skip it, and so on.

This is the oldest cliché in investing. Don’t put all your eggs in one basket. As boring as it may sound, it works. It makes sense to spread your deposits across three to four banks. These can be private banks or public sector banks. If one bank gets into trouble, and the RBI decides to put it under a moratorium until it figures out what to do with it, money in other banks will still be accessible.

2) Many people have a habit of putting all their savings in just one bank, simply because the branch is close to home or employees of that branch are more helpful than other banks. Many older people who are not digitally savvy tend to do this. Again, if the employees of a particular bank are helpful, then have your regular bank account, which you use to meet your monthly expenses, with that bank. Invest some of your savings with that bank as well, but don’t bet your life on it.

3) The moment people put their money in a bank, they assume it is safe, forgetting that banking is just another business at the end of the day. And businesses fail all the time. A bank borrows money at a certain rate of interest and lends it at a higher rate. If the money the bank lends is not repaid, it may not repay a part of the deposits.

However, it is rare for a bank to default on its deposits. That is simply because when a bank reaches that stage, the RBI typically merges it with another bank. In the past, New Bank of India was merged with Punjab National Bank, while Global Trust Bank was merged with Oriental Bank of Commerce. Recently, Yes Bank was rescued by a consortium of banks led by the State Bank of India. The assumption that the RBI will intervene in such situations creates an illusion of safety around banks.

While the days of commercial banks failing may be behind us, they can still be put under a moratorium. During that period, access to savings will be limited. Hence, this is one more reason to spread your money across different banks.

4) There is a lack of transparency around what most cooperative banks do with the money they take from depositors. Many of these banks are run by politicians and their cronies. This is not to say all cooperative banks are bad. But it is certainly difficult to figure out which are the good ones. Also, given their huge number and political connections, the ability of the RBI to regulate cooperative banks is rather limited. It makes sense to stay away from these banks in such a situation, even if they offer higher interest rates on deposits than commercial banks.

If you deal with a cooperative bank that offers great service, then do have an account with them, but again, don’t invest a bulk of your savings there. Just have enough money in such an account to help you meet your regular expenditure and not more.

5) A lot of people simply work on the assumption that public sector banks are the safest. Now, as I said earlier; it is not for you and me to figure out what is safe and what is not. The question that we need to answer is, how do we make our money safe.

Several public sector banks are in bad shape. They have had double-digit bad loan rates for years at end. Bad loans are loans that haven’t been repaid for a period of 90 days or more. They keep operating simply because the government keeps rescuing them.

But the fact of the matter is, there are some good public sector banks as well. So why not simply bank with them? So, what is it the bad public sector banks offer that keeps people stay with such banks? Maybe an extra 0.5 percentage points more interest on deposits than another bank? Maybe the clerks are polite? Maybe they have a locker facility? Maybe the branch manager is a nice chap? But is all of it worth the risk?

When is a better public sector bank available to deposit money, why go for a less healthy option? Laziness is the only plausible answer here. This is not to say the RBI and the government will not rescue these banks if they falter. They will. But what if the RBI, while sorting out the mess, restricts access to deposits for a certain period as it has done in the case of the PMC Bank. While the safety of deposits is paramount, you will agree that access to deposits is equally important.

The attitude that just because the money is in a bank, it is safe really needs to be dispensed with. There is always a certain amount of risk attached to money that is invested. A prudent way of dealing with this is to stay away from banks with a high rate of bad loans. Anything over 10% is a no-no. You can easily find the bad loans rate of your bank by Googling it or in the investor presentations that these banks publish every three months. This presentation is available on their website.

Vivek Kaul is the author of Bad Money.

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