By Joydeep Sen
While deposits in banks up to Rs 5 lakh are now insured beneath the Deposit Insurance Credit Guarantee Corporation Act (DICGC), the DICGC cover must not be the logic for your investments go with a bank that does not call for the DICGC insurance coverage cover.
The cause is, in spite of DICGC becoming there, some co-operative banks have gone bust and the circumstances are dragging on in the courts. In the case of Punjab and Maharashtra Cooperative Bank (PMC), Reserve Bank of India gave in-principle approval to a takeover by Centrum Financial Services, which would be a positive development. However, in these circumstances, the DICGC cover is however to be activated.
What to look at
The 1st and most critical criterion to look at is the ownership of the bank. As per RBI’s schedule of banks, offered on the RBI web page, there are 12 nationalised banks, like State Bank of India, which are also recognized as public sector banks. This is the safest category, due to the ownership of the government of India, at least more than 50%. Though it is not a stated assure on deposits, like that of DICGC, it is an implied aspect of security.
This has worked in the previous when a PSU bank is in difficulty, the RBI has stepped in and merged it with a somewhat stronger PSU bank. In any case, depositors’ revenue was protected and DICGC coverage was not needed. The underlying rationale is, central government-owned banks are an extension of the central government and can’t default, even if the basic good quality is not very good.
After PSU banks, come private sector banks. There are 22 private sector banks in RBI’s schedule. Most of them, at least the top ones, are in very good shape. The RBI has named 3 banks as systemically critical, which are State Bank of India, HDFC Bank and ICICI Bank. Recently, one private sector bank, Lakshmi Vilas Bank, was in difficulty and the RBI permitted it to be taken more than at a favourable valuation by DBS of Singapore.
Equity shares of the bank have been written off. However, depositors’ revenue was protected. In Yes Bank, further tier I perpetual bonds have been written off, but depositors’ revenue was protected. Hence in private sector banks, you have to take note, no matter if you are with a top private sector bank or one like Lakshmi Vilas Bank. The greater good quality private sector banks are not just the two systemically critical ones talked about above, there are other somewhat greater ones also.
Similarly, for foreign banks—there are 46 of them in the RBI schedule— you have to take note no matter if it is a top multinational bank or a somewhat modest one with some presence in India. There are other categories like modest finance banks, payment banks, regional rural banks, and so forth. Deposits might be protected in these banks, but ahead of putting your deposits, you might do your fundamental checks like no matter if they have paid their DICGC insurance coverage premium, the good quality and size of their balance sheet, and so forth. In the co-operative bank segment, there are state level co-operatives ones and there are the mid or modest sized or regional ones. There have been challenges in some modest sized and regional banks earlier.
Conclusion
The message is, you must not blindly go for a greater price in deposits as the ‘better’ one. A straightforward framework for a point of view on security has been discussed above. There are two implied elements on security apart from DICGC: (a) government ownership and (b) also major to fail (TBTF). In the non-PSU segment, we have seen Yes Bank and Lakshmi Vilas Bank deposits becoming ‘saved’ but a handful of co-operative banks have not been offered the extended rope.
The writer is a corporate trainer (debt markets) and an author