[saket77]

Hi! Good topic to discuss in today's date. I will cut everything short and ask all to stay away from 'co-operative' banks. In fact I wonder that why would one should park their life savings into a bank with a blurred definition? In the same way, I would also never walk into a 'small finance' bank like IDFC, AU small banks etc. I don't care a damn how their balance sheet and PL a/c looks like.

If you get into the history of 'co-operative banks' & bank failures in Indian context, you will realize that these are the only ones which have failed. No proper commercial bank has ever failed- be it private or a PSU bank. And this gives me the reason enough never to even think about parking my funds in these banks or even open an account in one; let alone trusting them with my life savings.

Originally Posted by SmartCat

There is a strong financial reason for keeping the deposit insurance amount low. If unlimited deposit amount is insured by Govt, then there is no reason for depositors to carefully pick a well run bank for their needs. That means, there will be no difference between "Mallya Bank" and "HDFC Bank". As a depositor, you will invest with Mallya Bank despite knowing that it is a poorly managed bank run by a fraud. There is no need for "lower quality" banks to offer higher interest rates, because depositors will invest there anyway.

Basically, low deposit insurance ensures that banks compete for your deposits. And it automatically rewards well run banks like HDFC Bank (they can offer low interest rates on deposits, but have no issues garnering deposits) and penalizes poorly managed banks (co-operative banks, for example. They have to offer higher interest rates to depositors)

Your posts on the matters of finance are really enlightening and I enjoy reading them always. However, the above quoted paragraph will be that rare instance where I don't agree with you.

If a bank is operating in the Indian financial system, then it is mandatorily regulated by RBI. This gives the investor almost a blind confidence that if after all, my bank is being looked over by the regulator and I have no reasons to worry. Regarding the interest rate divergences between the banks, let it be determined by the banks ability to attract those funds by their marketing efforts, advertising and general brand image and customer base. RBI must ensure that at least banks should not offer differential rates on the basis of their perceived solvency. There are a lot of private investment avenues which already offer interest rates even in double figures today; in which one may lose their capital!

Regards,
Saket

[Malyaj]

Very sad state of affairs. It is a reminder of how important it is to not put all your eggs in one basket. As someone who has most of his life savings stuck in an incomplete apartment project I can understand the pain of losing it all.

Apart from the excellent reasons provided by SmartCat, think of the implications of insuring the huge value of deposits. It will come at a cost and will translate into lower interest rates. Add to it the fact there is little or no useful historical data to work with when deciding the insurance premium for the possibility of a bank failing, unlike other risks. It is likely that the premium corpus will be excessive (idle funds and reduced liquidity) or will fall short (causing further mistrust of the system).

Bank FDs are 'safer' investments but not 100% safe. This is reflected in the interest rate. Banks such as SBI that believe they are too secure or "too big to fail" (read: Government bailing them out) offer piddly interest rates for this reason.

The problem is that for general public there is too much vigilance required to keep track of the financial health of their bank. I for one have no clue whether my bank is safe or not though it is one of the top private banks. It doesn't matter that I have nothing left to lose, but even when I did, I did not monitor anything. Moreover, media reporting starts happening when the downfall has accelerated and has become almost irreversible. Sadly these days with mounting NPAs and cases of businessmen on the run, one is not even inclined to trust the governance mechanisms of any institution.

[SmartCat]

Originally Posted by saket77

This gives the investor almost a blind confidence that if after all, my bank is being looked over by the regulator and I have no reasons to worry.

Saket, I really don't think you need to worry because neither RBI nor Govt will let a major bank go down. It would be suicidal for any Govt in power to let ICICI Bank go down, for example. It is in Govt's interest to ensure that depositors do not lose their life savings. As I mentioned before, no depositor has lost money in a 'proper' bank in recent memory. Govt/RBI will instruct 'good banks' to acquire 'bad banks'. Only the shareholders of 'bad banks' lose.

RBI must ensure that at least banks should not offer differential rates on the basis of their perceived solvency.

That's the whole basis/foundation of interest rates. Higher the risk (solvency), higher the reward (interest earned). If you mess with this concept, it will have disastrous unintended consequences.

[saket77]

Originally Posted by SmartCat

Saket, I really don't think you need to worry because neither RBI nor Govt will let a major bank go down. For example, it would be suicidal for any Govt in power to let ICICI Bank go down. It is in Govt's interest to ensure that depositors do not lose their life savings. As I mentioned before, no depositor has lost money in a 'proper' bank in recent memory. Govt/RBI will instruct 'good banks' to acquire 'bad banks'. Only the shareholders of 'bad banks' lose.

Of course that is! But I am not talking about the likes of ICICI & Axis Banks. I am talking about cooperative banks which are also regulated by RBI. Now, can we be sure that the depositors, although technically they are also shareholders, will get all their money back? If such banks come under the purview of RBI, then disasters like this shouldn't happen. As I stated in my last post as well, although no proper commercial bank has ever gone down in India, but many co-operative banks have failed. My point is only that if it is governed by RBI, then why should they be any less secure than the commercial banks. If any rules & clauses come in the way, they should be done away with to enhance depositor's safety.

Originally Posted by SmartCat

That's the whole basis/foundation of interest rates. Higher the risk (solvency), higher the reward (interest earned). If you mess with this concept, it will have disastrous unintended consequences.

Yes, quite obvious for all investments. But a bank FD rates, in a bank that is obviously governed by the RBI should not be rated in different solvency grades, in my opinion. Any deposit should be guranteed- at least the capital part. There are a lot of other factors which determine the FD rates, for example when banks want to increase their deposits, then they offer slightly higher rates and vice versa. This is often done in perspective of their lending plans in near future.

And even if they have to provide interest rates on the basis of solvency, then the deposit certificate should carry the grade awarded by the rating agencies. Just like how commercial papers are rated by the agencies. A lot of people who are not well versed in matters of finance will be able to understand where they are putting their money this way. Currently most of them think that their deposits are safe in all banks, including co-operative banks.

Regards,
Saket.

[Malyaj]

Originally Posted by saket77

My point is only that if it is governed by RBI, then why should they be any less secure than the commercial banks. If any rules & clauses come in the way, they should be done away with to enhance depositor's safety.

There is quite a bit of literature on why PMC bank failed. The question is whether RBI was caught napping or whether its checks and balances for Cooperative Banks are not adequate. This article from the Economic Times indicates there was fudging of data reported to RBI using technology.

https://economictimes.indiatimes.com...w/71606667.cms

This should serve as a wake up call to RBI and force it to adopt the same review mechanisms it uses for commercial banks.

Originally Posted by saket77

And even if they have to provide interest rates on the basis of solvency, then the deposit certificate should carry the grade awarded by the rating agencies. Just like how commercial papers are rated by the agencies. A lot of people who are not well versed in matters of finance will be able to understand where they are putting their money this way. Currently most of them think that their deposits are safe in all banks, including co-operative banks.

Good idea ! The only reason I can think that bank FDs are not rated is that the industry believes that RBI oversight is enough to ensure that the health indicators are meeting or exceeding the threshold and any better than threshold performance will automatically lead to lower interest rates being offered. Unlike in Corporate FDs where you might need help of credit rating agencies to use their sector insights to arrive at a borrowing rate.

[rovingeye]

Cooperative banks sound like shadow banks with little or no regulatory oversight from RBI. Does that mean they attract 'unclean' / questionable deposits? Maybe their reporting requirements are minimal and therefore interest income can be hidden by depositors?

I'm not sure about any of this. Just asking out of curiosity.

[Ithaca]

This PMC saga has spooked my mother as she cannot watch the news channels that show the innocent bank account holders crying for no fault of theirs.
Three people have unfortunately lost their lives so far.
My mom is hell bent on closing our only co-operative bank account where a few FD will mature by November end.
We will transfer this to a nationalized bank where we have other accounts.

Here are a few major co-operative banks that have been restricted by RBI.
1. Kapol Cooperative Bank - Restricted from 31.March.2017. Restriction not lifted yet.
2. CKP Cooperative Bank - Restricted from 02.May.2012. Restriction not lifted yet.

Source: Money Control Article

I do not know what is going to happen to PMC bank and going by the RBI track record of lifting restrictions on Co-op banks, things do not look as promising.

Most pensioners like my parents were lured by that extra 1~2% in FD rates to invest money in co-op banks and despite failure of various co-op banks, they still continued to believe that their co-op bank is in safe hands.

Have a listen to Ms Sucheta Dalal and her take on Co-Op banks.

https://www.youtube.com/watch?v=Lek6mrKHlkA

[Lalvaz]

Originally Posted by GTO

I frankly find it ridiculous that the government will write off big loans of PSU banks as bad debt, keep funding the white elephant Air India in tens of thousands of crores and yet, not do anything for the common man who thinks his money is safe in the bank?

Agreed, totally unfair that a depositor who trusts the Indian banking system loses his money for no fault of his, even in an era when bailouts of mismanaged PSU's and private cos is the norm.

Originally Posted by GTO

Where are the regulations? Where are stronger insurance policies or systems that safeguard my deposits? Where are the damn checks & balances? Why do I get only 1 lakh rupees if my bank shuts down?

Regulators are sleeping. They missed a fraud of this magnitude, 21000+ fake accounts, over 75% advances to a single firm, conflict of interest impacting the bank chairman who was also a director on the borrower's firm, a sleazy unqualified MD, a totally dubious statutory auditor, who has been involved in multiple fraudulent audits and was still allowed to audit a bank where there is a fiduciary responsibility to lakhs of depositors.



Also, the regulator should be taken to task for the pathetic announcements of withdrawal limits. There is no application of mind, first 1000, then 10000, then 25000, and now 40000. When the DICGC insures deposits of 1 lac in the event of liquidation, why make borrowers queue up like beggars? Just announce that 1 lac can be withdrawn now and the balance post investigation. Such a lame drama of showing they care for depositors.

Originally Posted by GTO

What I personally do = spread my funds across reputable banks (including, but not limited to, PSU banks). Absolutely won't put all my eggs in one basket. No co-operative banks or small players like IDFC for me.

Good for you, however, it isn't the job of depositors to assess the financial standing of the bank, not that he would even be able to do so. Thats the job of the regulator, RBI - which conducts regular inspections/audits of all banks operating in India. The spiel about cooperative banks being under a different ministry is true, but they are also subject to RBI audits and inspections, and hence RBI is answerable to the depositors. If RBI believes it has no control over cooperative banks, it should state that upfront, and not post a fraud. What next, Will RBI similarly shirk responsibility in case a large scheduled bank goes bust or perhaps a small bank? Time to call a spade a spade here.


Also may I point out that RBI's employee credit society also had an account with PMC? Did they not receive the same notice from RBI that cooperative banks are not under their purview and hence inherently unsafe and disreputable?

Originally Posted by ajmat

The problem is with the word "Co-operative Banks"

It sounds secure, warm and fuzzy. Quoting from today's Broadsheet

What are Co-operative Banks?



I will hazard a bet that depositors had no idea that they were shareholder and should have made the management accountable to them.

Not all depositors are shareholders. RBI being a regulator for banking in India is responsible for ensuring that people's faith in Indian banks is maintained. They owe it to the depositors to make good this loss for their acts of omission in this particular case.

Originally Posted by SmartCat

There is a strong financial reason for keeping the deposit insurance amount low. If unlimited deposit amount is insured by Govt, then there is no reason for depositors to carefully pick a well run bank for their needs. That means, there will be no difference between "Mallya Bank" and "HDFC Bank". As a depositor, you will invest with Mallya Bank despite knowing that it is a poorly managed bank run by a fraud. There is no need for "lower quality" banks to offer higher interest rates, because depositors will invest there anyway.

Your logic is flawed for the following reasons:
1) Depositors do not have a way to determine financial well being of many banks. For example: In this particular case, the audit report was fudged, the RBI inspections and audits were shoddy and showed no wrongdoing. Of course they were not even available to the common man, so please enlighten me as to how an ordinary depositor would have ascertained the fiscal health of this bank?


2) The Cooperative Societies Act mandates cooperative societies to have their bank accounts with cooperative banks. Hence you see the scenario wherein many cooperative societies including RBI employees were having their account with this bank. Ironically this was considered one of the premier cooperative banks in Maharashtra and a number of sick cooperative banks were merged with this one. The last audit report showed a net profit of 100crs.

Originally Posted by SmartCat

Basically, low deposit insurance ensures that banks compete for your deposits. And it automatically rewards well run banks like HDFC Bank (they can offer low interest rates on deposits, but have no issues garnering deposits) and penalizes poorly managed banks (co-operative banks, for example. They have to offer higher interest rates to depositors)

Wrong again. PMC wasn't offering substantially higher rates on FD's. Many depositors banked with them for other reasons such as holiday banking, better customer service, and convenient modern banking technology. To give you an example, a 2 year senior citizen FD was paying out 8%, which is not out of line with the interest rates in other banks. Even the govt Senior citizen scheme pays out 8.6% currently.

[Vasuki]

Originally Posted by saket77

Of course that is! But I am not talking about the likes of ICICI & Axis Banks. I am talking about cooperative banks which are also regulated by RBI. Now, can we be sure that the depositors, although technically they are also shareholders, will get all their money back? If such banks come under the purview of RBI, then disasters like this shouldn't happen. As I stated in my last post as well, although no proper commercial bank has ever gone down in India, but many co-operative banks have failed. My point is only that if it is governed by RBI, then why should they be any less secure than the commercial banks. If any rules & clauses come in the way, they should be done away with to enhance depositor's safety.

Regarding the regulation of the Co-operative banks by RBI, it is a figment of the imagination. The RBI does not have as much control over the Co-operative banks as compared to other PSU's/ scheduled banks. Why even during the late 2016, people could deposit an obnoxious sum of money in this Co-operatives without a PAN.

BTW just imagine PAN was made compulsory in the stock markets in the year 2006 itself and quite soon after that in the major banks.

These Co-operatives were mainly used by big political parties to launder their black money, so it had to and it will rupture. The sad part is that the common man will also suffer.

I have seen after demonetization many state governments had fought tooth and nail for relaxing the rules regarding PAN but RBI did stick to the guns.

Also the protection of just 1 lakh, it was from long back. Nobody cared before. But now seems winds are changing.

[AbhiJ]

I feel its a matter of time before one the insurance companies start issuing policies for account holders against banks going bust.

The situation is scary, and we don,t know/understand the extent of the rot.

[aniketi]

Originally Posted by GTO

I frankly find it ridiculous that the government will write off big loans of PSU banks as bad debt, keep funding the white elephant Air India in tens of thousands of crores and yet, not do anything for the common man who thinks his money is safe in the bank?

Where are the regulations? Where are stronger insurance policies or systems that safeguard my deposits? Where are the damn checks & balances? Why do I get only 1 lakh rupees if my bank shuts down?

Every day, I'm reading more & more stories about depositors crying, suffering heart attacks or dying because of the PMC Bank crisis. If the money of citizens isn't safe in a damn bank, where the heck will it be?

Don't agree. There are thousands of small banks, Patsanstha & small companies which are present in India. People know those are not under government and they are risky. Still people keep deposits in these banks because they offer more interest, near to home, etc. It is known fact that only 1 Lakh rupees are insured in such banks, still people ignore it & keep large amounts, then who is at fault here? They enjoy larger interest from these banks for long time, that time they never remember government. In fact most of people earn high interest and try to hide it so that they don't have to pay tax on it. Now bank has gone bankrupt, suddenly they remember government and want government to pay back their whole money? Why? If government start giving such money, we will see more and more banks going bankrupt and soon see government itself going bankrupt.

Government banks are almost 100% safe & till now no one has lost their money from PSU banks. Government backs them as government has large share in it, indirectly owns it. For same reason, Air India is also government owned and lots of its debt is because of government officials, bills which are not paid by different departments of it. I heard lots of politicians and their staff, families travel by Air India and don't pay bills. Also bad governance & corruption is there. These has happened lot in the past, now it is little better after Modi has come into power, but still long way to go. Correct me if i am wrong.

End of the day, people know what they are doing, right? Nobody forcing them to keep their money in any particular bank. When they know its a small bank which has no government backing, why keep all money there? Why to take undue risk for few more money? It's like buying a small car which has no safety features, you know there is a risk, still one buy it to save money.

[girimajiananth]

Quick question, what happens if I take loan from a bank and it shuts down? Do I still need to repay it? If so, to whom?

[saket77]

Originally Posted by girimajiananth

Quick question, what happens if I take loan from a bank and it shuts down? Do I still need to repay it? If so, to whom?

If your name isn't Mr. Mallya, unfortunately your loan doesn't cease to exist

Loans handed over to parties are assets for banks, if you see it from their perspective. And these assets are taken over by other banks with which they are merged/ taken over by in case of liquidation/ failure. So, for you, only the name of your creditor changes, nothing else.

In all, you can lose your deposits but not loans!
To take this one step further, imagine the plight if someone has 'loans against FD' in a bank that shuts down this way!!

[rovingeye]

Originally Posted by Vasuki

These Co-operatives were mainly used by big political parties to launder their black money, so it had to and it will rupture. The sad part is that the common man will also suffer.

That's exactly what I suspected. Absent regulation and oversight, their capital adequacy ratios and other risk management practices must have been zilch. Also, the attractive interest rates offered by such banks (and also other debt issuers in the market) should be an indicator of the heightened risks that come along with their debt instruments. But, the common man always falls for the 1% more rate of interest, without understanding the cost of the spread.

[Warwithwheels]

Originally Posted by BoneCollector

I came across this Whatsapp forward and apparently it's from some HDFC branch.

HDFC's statement: