Good judgment comes from experience. Experience comes from bad judgment. One need not face a bad experience to have good judgment. Sometimes you learn from mistakes. When Punjab and Maharashtra Cooperative (PMC) Bank Limited (Mumbai, Maharashtra) shocked its depositors last week, it gave depositors some lessons to learn.
For late comers, the Reserve Bank of India (RBI) has superseded PMC Bank management and placed the bank under an administrator for the next six months. The RBI initially capped cash withdrawal at Rs 1,000 per customer for six months and banned the bank from making fresh lending during this period. After an uproar over the low withdrawal limit, the central bank increased the withdrawal limit to Rs 10,000 per customer for the six month period. Punjab & Maharashtra Co-operative Bank is a multi-state scheduled urban co-operative bank with operations in Maharashtra, Delhi, Karnataka, Goa, Gujarat, AP and MP. It has been around for 35 years. Here are the most important lessons that every depositor must learn.
Avoid cooperative banks for keeping deposits
Avoid keeping money in co-operative banks. PMC Bank is a case in point. Over the years, we have seen many cooperative banks facing financial troubles. Examples include Kapol Cooperative Bank, Rupee Cooperative Bank, CKP Cooperative Bank, The Needs of Life Cooperative Bank etc.
Cooperative banks often fail because of their minute capital base. Cooperative banks are sometimes hijacked by vested political powers. As a result loans are given to entities who never return them back. As a depositor when you keep money in a bank, you are in effect giving a loan to that bank. Hence, it is important to lend your hard-earned money to only those banks and financial institutions that are stringently regulated by the RBI.
Never keep above 10-20% of deposits in one bank
Irrespective of the quality of the relationship and the length of the relationship with a bank, never keep more than 10-20% of deposits in one bank.
Deposits are insured up to Rs 1 lakh per account
After the PMC Bank crisis, many people assumed that their deposits are safe. If your bank deposit is more than Rs 1 lakh, you will get protection up to Rs 1 lakh only. What happens to the rest? It is not insured so anything can happen. As per Deposit Insurance and Credit Guarantee Corp website, all commercial banks including branches of foreign banks functioning in India, local area banks and regional rural banks are insured by the DICGC. Currently, all co-operative banks are covered by the DICGC. But, primary cooperative societies are not insured by the DICGC. Each depositor in a bank is insured up to a maximum of Rs 1 lakh for both principal and interest amount held by her/him in the same right and same capacity as on the date of liquidation/cancellation of bank's licence or the date on which the scheme of amalgamation/merger/reconstruction comes into force. The deposits kept in different branches of a bank are aggregated for the purpose of insurance cover and a maximum amount up to Rs 1 lakh is paid. So, if you have Rs 10 lakh across different bank branches of the same bank, you will only get Rs 1 lakh.
So, it is important that you don't keep more than Rs 1 lakh in one bank. If you have deposits with more than one bank, the deposit insurance coverage limit is applied separately to the deposits in each bank. This means instead of keeping Rs 10 lakh in one bank, it is better to keep Rs 1 lakh in 10 banks and have complete insurance coverage.
When is the DICGC liable to pay the Rs 1 lakh? The insured amount is paid only if a bank goes into liquidation or if a bank is reconstructed or amalgamated/merged with another bank. In the event of a bank's liquidation, the liquidator prepares depositor wise claim list and sends it to the DICGC for scrutiny and payment. The DICGC pays the money to the liquidator who is liable to pay to the depositors. In the case of amalgamation/merger of banks, the amount due to each depositor is paid to the transferee bank.
Diversify beyond bank deposits
If you keep the money in the banking industry, you are still exposed to one industry. Hence, use other options. The RBI 7.75% per annum Savings (Taxable) Bonds is a great option. You can choose to keep money in corporate deposits of PSUs, CPSEs and private sector firms like Tata that have impeccable standing. You can explore liquid debt MFs that invest only in Government Securities, Treasury Bills and Commercial Paper/ Certificate of Deposits issued by AAA-rated PSU entities. Some online platforms today allow you to directly invest in Government Securities. One of them is NSE goBid app and online platform. G-Secs come with Government of India guarantee. NSE goBid allows you to start G-Sec investment with as low as Rs 10,000.
Look who your bank, financial institution lends money to
As a financial depositor, you may prefer keeping money in the bank and stop worrying about it. But, that's a mistake. Smaller banks can lend money to questionable borrowers or lend a huge amount of money to one borrower. Such practices are common place. In the case of PMC Bank, we have seen how this bank lent money to one borrower and that led to a cycle of problems. Joy Thomas, who has been suspended as the managing director of Punjab and Maharashtra Co-operative Bank, last Friday reportedly admitted that the bank hid information regarding its bad loans to bankrupt real estate company HDIL. The bankrupt real estate firm's exposure to the bank stands at over Rs 2,500 crore, around 31% of PMC Bank's loan book of Rs 8,300 crore as of March 2019. As a depositor, you must keep an eye on which borrowers are getting loans from your bank. Individual borrowers carry the least risk. The maximum risk comes from lending to private sector companies, especially involved in real estate and infra. Keep a watch on the percentage of exposure to borrowers and their sector. (The writer is a journalist with 14 years of experience)