Keep your money safe: Stick to systemically important banks for safety

Be wary of co-operative banks which have historically been most vulnerable

Recent collapses of banks like Silicon Valley Bank and Signature Bank in the United States, as well as European bank Credit Suisse's takeover, have left customers worldwide feeling uneasy. In India, past incidents involving banks such as Punjab & Maharashtra Cooperative (PMC), Yes Bank, Lakshmi Vilas Bank, Global Trust Bank, and others have also added to concerns.

Choosing your bank with care has hence never seemed more important. If your deposits are with a bank that gets into trouble, the Reserve Bank of India (RBI) may eventually find a stronger bank to take over the troubled entity. But you could lose access to your funds during the period of moratorium (imposed to avoid a bank run). Exercising a few precautions in bank selection can help avoid such unnecessary anxiety.

SIBs: At apex of safety ladder

A retail customer may find it difficult to evaluate a bank’s health. They could just go with a bank that has been labelled a systemically important bank (SIB) by the RBI.

“A simple thumb rule of opting for a ‘too big to fail’ bank would suffice. These are banks like SBI, ICICI and HDFC, which the RBI has categorised as crucial to our economy,” says M. Pattabiraman, associate professor, IIT Madras and founder, Freefincal.com.

SCBs: Loss of money is unlikely

If you venture beyond the SIBs, stick to scheduled commercial banks, where you are unlikely to lose money.

“I would not worry about losing my money in a PSU bank. I would also not worry if it is in a top-tier private-sector name. The government and RBI will not let them fail,” says Deepesh Raghaw, a Securities and Exchange Board of India or Sebi-registered investment advisor and founder, PersonalFinancePlan.

Arnav Pandya, founder, Moneyeduschool holds a similar view. “RBI will not allow a bigger bank, either public-sector or private-sector, to fail because that would have an adverse impact on the entire financial system,” he says.

SFBs: Take limited exposure

Small Finance Banks (SFBs) are a relatively new category. No crisis has occurred in a bank belonging to this category yet. “I don't think even these banks will be allowed to fail,” says Pandya.

A limited portion of one’s deposits may be parked in them. “Doing so will enable you to earn slightly higher returns,” says Pandya. Avoid parking more than 20 per cent of your total deposits in them.  

According to Adhil Shetty, chief executive officer (CEO), Bankbazaar, “When investing in an SFB, make sure your principal and interest earned during the tenure together don’t exceed the deposit guarantee limit.”

Steer clear of co-operative banks

Bank customers concerned about safety should avoid co-operative banks, especially in the current environment. “Historically these have been the most vulnerable within the banking space,” says Pattabiraman.

Diversify to stay safe

There are a few other markers that bank customers should pay heed to. “If a bank’s lending rate (for, say, home loan) is much lower than that of established banks and the borrowing rate (say, for FD rates) is much higher, that is a sign of an establishment aggressively looking for higher market share. That often doesn’t end well,” says Pattabiraman.

Avoid concentration risk. “If you have money spread across two-three banks, you won’t face liquidity problems,” says Pandya.

It is also advisable to have higher exposure to larger, established banks and lower exposure to the riskier ones.

Senior citizens should be especially wary. “The bulk of their deposits should be in established banks and the post office, which enjoys sovereign guarantee,” says Pattabiraman. 

Raghaw suggests that senior citizens should utilise products like Senior Citizens Savings Scheme (limit hiked to Rs 30 lakh per person) and Prime Minister Vaya Vandana Yojana (available until March 31) to the hilt before venturing into SFBs for higher returns.

They may also invest in government securities (G-Secs) via the RBI Retail Direct platform as these come with sovereign guarantee, offer bi-annual income, and have rates higher than what many bank FDs pay. 

Tips to maximise deposit insurance coverage

Deposit insurance offered by Deposit Insurance Credit Guarantee Corporation (DICGC) is available up to Rs 5 lakh per bank per customer

This limit applies to all types of accounts aggregated: savings, account, fixed deposit, recurring deposit, etc

Money kept in various branches of the same bank is also aggregated and insured up to Rs 5 lakh

To enhance the protection from deposit insurance, deposits may be spread across family members and across banks

If there is one joint account where A is the first name and B is the second name, that will be treated as separate from another where B is the first name and A is the second

If a person opens deposit accounts in his capacity as a partner of a firm, guardian of a minor, director of a company, or trustee of a trust, those accounts will be considered to be held in different capacities and will enjoy separate insurance covers