By Raj Khosla
The Lakshmi Vilas Bank (LVB) crisis has shocked lakhs of customers and investors in the troubled bank. In hindsight, it is easy to point out what went wrong at the bank that ultimately led to its shotgun merger with DBS. However, it cannot be denied that the writing was on the wall for quite some time. Whether it was PMC Bank or LVB or any other troubled financial institution, there was a steady decline in the financial position of these banks.
There is very little that you as a customer or depositor can do after a bank puts restrictions on withdrawals. Likewise, shareholders can do precious little when the share price is falling every day. But if one takes preventive steps, one can avoid getting caught in such thorny situations. Here are a few steps that can help:
Don’t get lured by high rates
In fact, LVB was offering high rates of interest on deposits. High rates are a sign that the bank is desperate for deposits, and is trying to lure customers. The 1-2 percentage point higher return should not be the reason to go for a less secure deposit. Put your money in a well-capitalised bank so that it stays safe, even if that means earning a little lower rate of interest. Safety, not returns, should be the primary concern.
One comforting aspect for depositors is the Rs 5 lakh deposit insurance offered by the Deposit Insurance and Credit Guarantee Corporation (DICGC). However, the insurance is limited to only Rs 5 lakh per customer. If his deposits are higher than Rs 5 lakh, the customer could face a possible loss.
Not all eggs in one basket
It is also not wise to rely only on one institution for a critical service such as banking. Smaller banks such as LVB should never be the primary account. Always maintain 2-3 bank accounts. Keep one account in a full-service new generation private bank to gain from the efficiencies these offer. Make sure it is a well capitalised bank (HDFC Bank, Axis Bank or ICICI Bank). Another could be in a well-capitalised PSU bank such as State Bank of India or Punjab National Bank.
Similarly, when investing in bank deposits, spread your money across a number of banks. Diversification across 2-3 banks will also enhance the deposit insurance cover. The cover is Rs 5 lakh per individual per bank.
Steer clear of weak fundamentals
LVB’s weakening financials were no secret. The major problem is the bad loans on its books, which have completely wiped out its net worth. The Gross NPA of the bank has been consistently increasing for the past three years. Gross NPAs were 10% in 2018, which increased to 15.3% in 2019 and are now 25.4% in 2020. That means Rs 1 out of every Rs 4 lent by LVB is not coming back. In contrast, strong banks such as HDFC Bank and Kotak Bank have gross NPAs of 1.08% and 2.55% respectively.
Investing in a bank with a gross NPA of 25% and net NPA of almost 10% is too much of a gamble, for very little extra returns. Unfortunately for shareholders, the RBI’s draft scheme of amalgamation says the shares or debentures of LVB shall stand delisted upon the merger. So the price will eventually fall to zero. Investors who are still buying the shares in the vain hope that values might recover are throwing away their hard-earned money.
Essentially, keep a hawk’s eye vigil on the fundamentals of the bank you are dealing with and shift your account at the first hint of trouble. Furthermore, maintaining accounts with multiple and diverse banks will always help.
(The writer is managing director, MyMoneyMantra.com)