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BUSINESS
How safe is your money in banks?
By
Devajit Mahanta
ON 11TH OCTOBER, India’s
largest private bank ICICI sent SMSs to every depositor, assuring them that
their money was secure, by mentioning that “Your deposits with ICICI Bank
are safe. Your bank is well capitalized, with good liquidity. Please do not
listen to baseless rumours. Happy festive season.”
Amid rumours about the financial health of ICICI Bank, RBI issued a
statement that ICICI Bank has sufficient liquidity, including current
account, with the Central Bank to meet the requirements of its depositors.
While choosing a bank account in western countries, customers probably choose
according to the services provided, but in India, while choosing a bank
the first question that comes to mind is “How safe is my money?”
The recent liquidity crunches creates certain questions in people’s minds –
“Are we really secure in a flattened world?” “What would happen in case a
bank went down under?” If the collapsed bank is small, then RBI could take
care of the depositor’s interest by way of a merger. But what will be done
if a bank’s balance sheet is huge? A large bank cannot be merged with
another bank as this might make even the other bank go down under the
burden of the losses.
Most economists suggest enhancment of the insurance amount of customers.
Presently all deposits up to Rs. 1 lakh in a commercial or cooperative bank
in India
are insured by the Deposit Insurance and Credit Guarantee Corporation of
India (DICGC) – a wholly owned subsidiary of RBI.
Again, problems may arise if the insurance company has to pay a large
number of depositors. Where will the money come from? Though it is tough
question to answer in a straight way, the government’s participation in
banks becomes relevant again.
Even Prime Minister Manmohan Singh on October 20 assured the Lok Sabha that
deposits in Indian public and private banks were entirely safe and asserted
that the government would continue to take measures to minimize the impact
of the global financial crisis on the Indian economy.
After the PM assured protection to the Indian banks from the global
turmoil, RBI announced a cut of 100 basis points in prime lending rate for
first time since March 2004 – a move which will help banks to borrow funds
from RBI at a cheaper rate and pass on the benefits to customers.
According to RBI Governor Duvvuri Subbarao Indian banks have very limited
exposure to the US
mortgage market directly or through the equity and forex derivatives which
minimised the impact of the global crisis on Indian economy. But he did not
deny the fact that the global crisis reduced the investor’s confidence,
which could impact capital outflows significantly.
Due to global turmoil the non-performing assets, or NPAs of certain banks
are going up, as consumers have started defaulting on their payments with
the rise in interest rates. Still, the best way of judging a bank’s health
is by looking the parameters like capital adequacy ratio, asset quality and
earnings, which define their ability to pay depositors.
ICICI Bank executive director P. Vaidyanathan says that if the NPAs go up
due to increase in interest by a few basis points, bank wouldn’t be worried
because bank will always make enough money since the operational costs do
not go up.
India’s
bank mortgage system is safe in many ways. The loan value ratio is always
modest because buyers have to pay a certain amount as a margin. For
example, if a customer showing the price of a flat of Rs. 50 lakh takes a
home loan of Rs. 40 lakh and pays Rs. 10 lakh to the builder, then the
customer puts up 33% of his own equity. So, in case of a default, even
after price of the property has gown down, the bank can cover up losses
after taking over the property and selling it.
Finally, if our banks are well regulated and well capitalized by the RBI
then all the depositors’ amount will be safe because Indian banks do not
have any direct exposure to US
sub-prime mortgages.
Readers can send their feedback at devajitmahanta@gmail.com
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