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What Depositors Can Learn From The PMC Crisis

Adhil Shetty
Photo by Pixabay

It must be nightmarish losing one’s hard-earned money despite entrusting it to a bank. A cooperative bank in Maharashtra is undergoing a public crisis following the RBI’s directive to the bank to not engage in any business for the next six months. Withdrawals from the bank have also been capped. It was discovered that the bank had not declared its NPAs accurately and had been lending to a real estate developer beyond regulatory limits.

Cooperative banks are registered entities under the Co-operative Societies Act. As they comes under the purview of the Banking Regulation Act 1966, the RBI looks after their regulation, but the state government has control over their management related matters. The RBI has restricted for six months regular transactions from the bank, and its customers were allowed to withdraw Rs. 25,000 only. The withdrawal restriction applies to all depositors, including current account, savings account, and deposit account holders.

Even though banks are considered the safest place to invest your money, a crisis such as this provides a rude lesson that banking is ultimately a business and it can fail. Let us delve deep into the crisis to learn a few lessons about how to manage your money while keeping it safe too.

The Crisis And What Happens To Depositors Money

Your money up to Rs. 1 lakh deposited in any bank is insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC). So, if a bank collapses, you are entitled to an amount up to Rs. 1 lakh against your deposit. Unfortunately, losses over that limit are not covered by the insurer.  However, in some cases, the central government may step in to bail out a bank and prevent its collapse.

What Happens To People With EMIs, Auto Debit Mandates?

With RBI’s restriction on money withdrawal, the auto-debit facility for accounts as mandated by the customer will not work. For instance, if your mutual funds SIP auto-deduction is routed through the impacted bank account, it will not work, and therefore you should switch this to another bank account to avoid discontinuation.

If you have taken a loan from, and have EMIs paid from, the same bank, the amount will be deducted from your account, but if the balance is insufficient, you need to deposit the EMI against such loan in a timely manner. Similarly, change the bank detail for your insurance premium payment and other investment options.

What Are The Lessons PMC Bank Crisis Teaches?

While choosing a bank, do remember to check its financial records, and if you find it difficult to understand, you can seek the help of a qualified financial advisor.

Avoid banks that are offering  products that seem too good to be true. For example, FD rates at a much higher interest rate than the rates being offered by other banks should be can be a red flag.

Check the capital adequacy ratio of the bank, its NPA level, and profitability in the past 2 to 3 years to ascertain its financial strength.

People often choose co-operative banks over bigger banks because of varied reasons like attractive interest rates on FDs, proximity or location, lower documentation etc.

However, while doing so, most of us remain oblivious to the safety of their money thinking all banks are safe. The recent crisis is an eye-opener and throws light aspects of banking consumers need to be aware of.

It also pays well to diversify your money in different bank accounts or investment instruments to ensure liquidity even if a crisis strikes.

Your fixed deposits should ideally be spread in different banks. You can also open these deposit accounts in the names of your family members, so that your risk is diversified.

For major funds such as retirement savings, you’d be advised to trust only established and stable banks, even if this means losing a few basis points in terms of interest. You may go for a mix of private and public sector banks.

If you have an account in an impacted cooperate Bank, you should wait for a few months to know what the RBI plans to do. It is very difficult to see your hard-earned money getting into trouble, it’s time to keep patience and hope for the best. Also, going forward, don’t rely on a single bank for your banking needs. Thoroughly research your options and go with banks where your returns and capital safety are optimised.

The writer is CEO, is India’s leading online marketplace for loans and credit cards.