Depositors’ Dilemma

“If we want to save the bank, then depositors have to be protected”
Depositors’ Dilemma
Representational Pic

Let me begin today’s column with an incredible statement from Prime Minister Narendra Modi; “If we want to save the bank, then depositors have to be protected.” He stated this on Sunday while addressing a gathering on the “Depositors First: Guaranteed Time-bound Deposit Insurance Payment up to ₹5 Lakh” in New Delhi. In the last few days, more than one lakh depositors have got their money back that was stuck for years. This amount is more than Rs.1300 crore.

Remarkably, the government has increased the bank deposit insurance cover from Rs 1 lakh to Rs 5 lakh. The amount has to be refunded to the depositor within 90 days. Under this deposit insurance scheme, if a person faces any problem or setback for all of his deposits in a bank, and if the bank is incapable of returning the deposit, then the depositor will get a maximum refund of Rs 5 lakh within 90 days of the claim. The deposit insurance covers all deposits such as savings, fixed, current, recurring deposits, etc. in all commercial banks, functioning in India. Apart from this, deposits in State, Central and primary cooperative banks, functioning in States or Union Territories are also covered.

The insurance cover to the depositors’ money up to Rs. 5 lakh and settling the claim mandatorily within 90 days is a confidence booster to the depositors who have been in dilemma for the last few years owing to bank failures. Basically, there has been an element of mistrust in the financial system, where depositors’ trust has been falling. It was declining even before COVID-19, but the pandemic has made things worse. Let’s take a look at the tale of depositors’ mistrust and banks coming across deposit fluctuation as their depositors are investing money somewhere else.

As all of us know that coronavirus has consumed millions of human lives and continues to remain a lethal threat with new variants emerging on the scene at regular intervals. The virus has registered itself as one of the most deadly viruses in modern times. Amid these never-seen-before challenges on the health front, the virus has severely impacted all sectors of the economy. However, during the course of adversities which the virus brought to the already ailing economy, it threw an opportunity to clear the mess in various sectors, which was intentionally or unintentionally overlooked in pre-Covid times. At least, the virus brought the authorities on tenterhooks to set corrections in motion to streamline things in line with the changing situation.

One of the major advantages of the virus outbreak goes to the financial sector which has remained in a messy situation for decades. It badly hit the weak spots in the system and many loopholes were identified, which otherwise had remained hidden in pre-Covid times. Some ‘glittering’ financial institutions and banks lost steam as soon as coronavirus-induced lockdowns hit the scene and the Reserve Bank of India (RBI) was forced to take action against them in the interest of the public, especially the depositors.

For example, the apex bank (RBI) on March 5, 2020 imposed a moratorium on Yes Bank, which was making hay in pre-Covid times as one of the fastest growing new generation private banks, and put restrictions on withdrawals up to Rs.50,000 until 3 April. This was a major dose of diffusing the confidence of depositors on the banking system. The move, which was inevitable as the Yes Bank had undergone a steady decline, sent shivers down the spine of the common men as they started fearing for their monies parked in various banks under different schemes.

Earlier, it was the Punjab and Maharashtra Co-operative (PMC) Bank crisis, where the RBI had put a cap on the withdrawal of deposits. During this financial year, the RBI has been exercising its authority to put a cap on withdrawals in a number of financial institutions and banks.

In a way, weaknesses of the banks which are surfacing in Covid times at various levels after remaining unattended in pre-Covid times is a challenge to the Reserve Bank of India on credibility front. During the global economic crisis in 2008-09, when recession hit countries across the globe, the RBI was praised for its strong banking regulatory measures which to a large extent insulated India against any major harm of the global recession. But, now the bank failures have put the regulator in a tight spot. Even bank experts and other financial professionals have been raising fingers on the regulator for being deficient in taking timely action to prevent bank debacles.

An analysis of the problems forcing merger of banks and putting a moratorium on deposits of a bank in trouble, various problems including issues of divergence, non-disclosures, mounting bad loans, inadequate capital, inability to augment capital, etc. have been quoted by the authorities to justify the act. This justification invites questions about the quality of supervision, control and audit conducted by the central bank as a regulator. These problems have not cropped up in a day, week or a month. How such lapses have missed the sensors of the regulator? If audit reports had pointed out such lapses, why were they ignored till a debacle happened?

Precisely, bank failures in a growing economy doesn’t sound a bright future

Meanwhile, there are certain lessons which can be derived out of the mess in which the banking industry is enveloped. Let’s talk about new generation private sector banks. We have observed that these banks have been majorly focusing on customer service. They leverage technology to its full potential to achieve customers’ delight and mostly woo customers on the basis of the state-of-the-art customer service. In this whirlwind of technology loaded delivery systems, they never allowed their customers to focus on their fundamentals – the assets and liabilities. It never comes to the mind of their customer to check the safety of the bank in which they are parking all their hard earned money.

The fiascos surfacing in the banking industry point to a fit case for depositors to adopt ‘Know Your Bank’ policy for choosing a bank. If banks have ‘Know Your Customer’ policy in place to measure the risk profile of their customers, ‘Know Your Bank’ policy can prove an effective tool in the hands of depositors to evaluate the risk profile of a bank.

What I mean to say is that the times have changed and so has financial architecture. If technology has revolutionized the banking system and facilitated ease of doing business, it has at the same time put the financial system in a whirlpool of new risks. The ability of banks to mitigate these risks needs to be measured by the customers now to stay safe. It makes sense for the customers now to have a look at the fundamentals of their banks carefully. Here measuring the asset quality of a bank is an important parameter. If you observe stress on stress with a tendency to impact the capital of the bank, then take it as an alarm of a fiasco like the one of PMC Bank or Yes Bank. There are other certain parameters such as provisioning coverage ratio, capital adequacy ratio (CAR), currents and savings account (CASA) ratio, which a common customer can check to evaluate the safety of the bank.

Who owns the bank? Today, you need to know the answer to this question. Precisely, ownership structure of a bank is a crucial indicator as far as safety of the bank is concerned. It’s actually the spine of the bank. Banks having frequent changes in ownership structure are always confronting challenges. Here, a government ownership does provide a strong spine to the bank.

(The views are of the author & not the institution he works for)

Disclaimer: The views and opinions expressed in this article are the personal opinions of the author. The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

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