By maintaining an account with two to three banks, you can distribute your money and reduce your risks emanating from any one bank to some extent
Of late, the Reserve Bank of India (RBI) imposed a one-month moratorium on Yes Bank after it failed to recover from deteriorating financial health. As a result, the accountholders of the troubled bank are restrained from withdrawing more than Rs 50,000 for now. When a large financial institution gets into trouble, the common people panic about the safety of their money with banks. So, what can you do to ensure the safety of your money and minimise banking risks? Here are a few pointers which you are likely to find very helpful.
(1) Choose your bank wisely
There are so many banks in India, but are all banks the same? What differentiates one bank from another? Why you should open or not open an account in a particular bank? If you ask these questions before opening a bank account, it can help you to make a wise decision while selecting the bank. We’ll get into the finer details of how to evaluate banks below.
(2) Have relationships with multiple banks
Diversification not only works when you invest money but it can also help you reduce banking risks. By maintaining an account with two to three banks, you can distribute your money and reduce your risks emanating from any one bank to some extent. However, don't open accounts in too many banks because it would require you to maintain a minimum balance in each account, and you’ll also need to pay account charges such as annual debit card charges. If you fail to operate them regularly, your account may become dormant. Also, having too many accounts makes it difficult to keep track of the statements, charges, transactions, passwords, etc.
(3) When in doubt about a bank, limit your deposits to Rs 5 lakh
Union Finance Minister Nirmala Sitharaman announced in her Budget 2020 speech that the Deposit Insurance and Credit Guarantee Corporation (DICGC), an RBI subsidiary, will increase its insurance cover of bank deposits to Rs 5 lakh per bank per customer in case the bank fails. This insurance cover includes deposit amount and interest thereof. Meaning, suppose you have an FD of Rs. 5 lakh and the interest on it is Rs 25,000, the maximum insurance cover would be Rs 5 lakh on the bank's default and you may lose Rs 25,000 in interest earnings. So, if you are not sure about your bank’s financial health, you’ll be well-advised not to deposit more than Rs 5 lakh with it. If you want to deposit more than Rs 5 lakh, you can distribute your fund in two to three banks.
(4) Regularly check the financial health of your bank
Now, this could be a slightly difficult task for the common people, but evaluating one’s bank on a few critical parameters has become necessary, and could help avoid troubles later.
Agencies like Moody’s, ICRA, etc. regularly update the credit rating of different banks and financial institutions. If you monitor the credit ratings of your banks and spot a consistent fall, you might not want to increase your fund exposure in them or, if required, change the bank.
Similarly, you can check the balance-sheets of your banks which are in the public domain and see their NPA ratios. A high NPA ratio is another red flag. The share price of banks is another parameter to check their health. A bank’s share price will fall when its business doesn’t perform as per expectations of profitability, NPAs, corporate governance, and other parameters. Therefore, a falling share price should give you cause for concern.
Final thoughts
The RBI governs all commercial banks in the country. Whenever there has been a crisis, the central bank has always played a proactive role in protecting the accountholders and ensuring they do not lose their hard-earned money. So, the RBI is a crucial layer of protection, whereas the steps mentioned above can provide you with an extra cushion against banking risks.
Adhil Shetty is a guest contributor. Views expressed are personal.
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