Know Your Bank

Global banking crisis is refusing to die. More and more banks are being engulfed by this wave of crisis. However, analysts believe that the crisis is not going to cause disruption in the Indian banking industry as the deposit structure of the Indian banks is totally different from the banks that faced run on the deposits in the us.

Here the deposit-holding pattern in Indian banks merits a mention. Analytical reports reveal that 60 percent of deposits of banks are held by households, which are sticky in nature.

These households do not move quickly to other investment options and take a considerable amount of time to shift their savings from banks to some other investment avenue. Reports also reveal that on the asset side, 60 per cent are held in the form of loans. While 25 per cent of the assets are parked in other investment avenues.

Basically, in the last couple of years all is not going well with the banking industry. In the Indian banking industry, it was in March 2020 the moratorium on Yes Bank shook the confidence of depositors across all banks in the country.

The finance minister and the governor of the Reserve Bank of India were forced to reach out to the general public through media to allay the fears of the depositors.

If we look at the problems forcing merger of banks and putting a moratorium on deposits of a failed bank such as PMC Bank & Yes Bank, various problems including issues of divergence, non-disclosures, mounting bad loans, inadequate capital, inability to augment capital, etc. were quoted by the authorities to justify the act.

These problems didn’t crop 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?

Historically speaking, bank failure is not something new in the country. A Moneylife report states that since independence the country has had to deal with a whopping 701 bank failures, 37 of them having occurred after nationalization. Like any epidemic, the virus causing the failure of banks appears after every couple of years.The occurrence of bank failures is genuinely instilling fear of losing the head earned money among the depositors. However, the banks provide deposit insurance facility to its depositors to the tune of Rs.5 lakhs and that is free of cost as the insurance premium is borne by the banks. The onus also rests on the bank customers also as they have to be financially literate to understand the health of the bank in which they are depositing their savings. Yes, I am talking about Know Your Bank (KYB).

What are the lessons for a bank customer amid the unfolding of the global banking crisis?

There are certain lessons which can be derived from the crisis. 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 customers to check the safety of the bank in which they are parking all their hard earned money.

The Yes Bank fiasco opened a Pandora box and serves as a constant reminder for the depositors to know all about their bank, especially its fundamentals. The fiasco, in a way, has rolled out a fit case for customers 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 important. 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 on cards. There are certain parameters such as level of non-performing assets, provisioning coverage ratio, capital adequacy ratio (CAR), currents and savings account (CASA) ratio, which a common customer can check to evaluate safety of the bank. Provisioning coverage ratio of more than 60% and a CAR of minimum 9% indicates the bank is safe. Higher the CASA ratio, the better it is for the bank.

Last but not the least, don’t get lured to ‘magical’ customer service offered by a bank. Even don’t get attracted by high interest rates when other banks are offering lower rates. Focus on the financial strength of the bank as mentioned above.

Does ownership structure of a bank matter?

Yes. Who owns the bank? Today, you need to know the answer to this question. Precisely, the ownership structure of a bank is a crucial indicator as far as the 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.

How bank failures, if any, can meticulously be handled in the country?

The Financial Resolution and Deposit Insurance (FRDI) Bill providing for establishing a resolution authority, which would have powers to undertake prompt resolution for banks was introduced in the Lok Sabha in 2017. But it was later withdrawn due to stiff opposition on some controversial provisions. Since bank failures are occurring after every couple of years, the time demands to re-introduce the bill and pave the way for establishment of a Resolution Corporation.

A Resolution Corporation will exercise control over banks, insurance companies, regional rural banks (RRBs), cooperative banks and other financial institutions. It is projected as a way to ensure that a bank is resolved rather than liquidated, as depositors are expected to get a much higher value in resolution of the bank as a going concern than in liquidation.

Precisely, the Resolution Corporation will monitor the health of the financial entities like banks and in case of their failure; will come into play to try and resolve the issues confronting them.

However, the controversial ‘bail-in’ option in the bill which can lead to cancellation of repayment of various kinds of deposits needs to be restructured so that the depositors of a failed bank don’t lose their hard earned money.

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.