The moratorium on Yes Bank on 5 March 2020 has shaken the confidence of depositors across all banks. The finance minister and the governor of the Reserve Bank of India had to reach out to the media to issue clarifications and allay the fears of the depositors.
But the run on the banks is not a unique phenomenon in India. Since independence the country has had to deal with a whopping 701 bank failures, 37 of them having occurred after nationalization. Like any epidemic, the virus causing the failure of banks appears after every couple of years.
The fear of losing the hard earned savings stems from the fact that bank customers are actually ignorant about the health of their bank. The factors that contribute to the ignorance are:
1. Very low financial literacy.
Financial literacy means the ability to make informed financial decisions in relation to savings, investment and borrowings. Financial literacy in our country is at a dismal 19.2 %.
2. Banks recommended by friends and relatives.
The unverified word of mouth plays a huge role in the decision making process of choosing a bank.
3. Glamour of the bank and its services.
Customers also get carried away by the glamor and smooth talk of the relationship managers (RMs) and sales staff and take decisions without the application of mind.
4. Lack of transparency about banks
There is no foolproof one point method to find out the health of the bank and a little research is required.
5. Trust and belief in the system
Except for small cooperative banks, the regulators and the government have always ensured that the depositors of failed commercial banks are accommodated. This results into a sense of false belief.
6. Mis-selling by bank staff.
There is rampant mis-selling in the banking industry because the sales and service/ operations are managed by different verticals in a bank with incentives and payouts for sales force directly in proportion to acquisitions.
7. Decision of bank accounts taken by someone else.
Salary accounts are a classic case. The decision to open the bank account is taken by the employer without any option given to the employee concerned.
8. Sheer laziness to find the facts for oneself.
Finally another prominent reason is sheer laziness on the part of the bank customer to enquire about the health of his banker.
In the coming days the banking industry is going to be driven by technology. The customers are losing connect with their bank staff. It is of paramount importance that customers take informed decisions and select banks which are in good health.
“hito wo mitara dorobo to omoe” is a famous Japanese proverb which states that “It is best to regard everyone as a thief.” Bank customers in their own interest need to follow some fundamental rules to safe guard their hard earned money.
I. Split bank deposit into sets of three or four and bank with different banks. Family members should bank with different banks.
II. Keep periodically checking on the health of your bank, especially on three or four main parameters namely, capital adequacy, net non-performing assets (NPA) percentage, penalties levied against the bank and unusual reduction in market capital of the bank.
III. Employers availing credit limits are often compelled to open salary accounts of their employees. Ensure that the salary credit to this account is immediately transferred to the bank of your choice.
IV. It is a good idea to keep routine transactions in one account and your fixed deposits with a couple of other banks. Deposits earmarked for long term goals should be with public sector banks only.
V. Banks offer higher rate of interest only when they fail to attract deposits at market rates. The greed for higher interest rates should to be curbed.
VI. Technology gives great convenience and can be used very diligently. Limits and auto transfers must be setup at intervals using the facilities enabled through digital banking.
VII. Never hesitate to ask the branch manager or the relationship manager difficult questions about the health of the bank.
VIII. Be wary of RMs selling third party products and always cross check with financial experts. Give preference to a fee based investment advisor or paid websites that are not associated with any financial institution.
IX. Postal Deposit schemes are totally safe, and offer decent returns at the cost of shoddy customer service. Be sure to allocate a portion of your savings with the post office.
X. It is a good idea to set up Google news alerts for all your bankers and investments. News alerts relating to sharp downfall in stock prices, penalties levied by regulators, resignations of top management /directors and bulk sale of stocks by the senior management personals should be examined in detail.
All the above steps put into practice will enable you to identify weak banks, spread your investments across institutions and limit losses in case of any individual bank failure.
Role of the Regulator:
The Reserve Bank of India should play an active role in assisting the customers in making informed choices while selecting their bank. Banks should be mandated to provide the information relating to their health, namely capital adequacy ratio, net NPA, profitability, liquidity, and penalties levied for noncompliance to all depositors and these should be prominently displayed across the bank branches and websites. Synopsis of the inspection report of RBI along with the rating awarded, should be shared with all the customers.
The balance sheet of RBI as of 30 June 2019 shows a huge sum of Rs257.47 billion in the Depositor Education and Awareness Fund (DEAF) account. This fund should be effectively used to spread awareness among the bank customers. In addition to the National Centre for Financial Education (NCFE), a separate institution reporting to the RBI should be created and all depositor education and awareness programmes should be conducted through this institution. It would be a good idea to empanel local colleges suitably supported by retired bankers to run the education and awareness programs at local levels. Print and visual media can be extensively used for creating awareness.
Finally it’s important to note that banking industry is going through a transformation. Public sector banks are slowly but surely giving way to private sector banks. Banking is also a business venture and like any business, susceptible to failures. The day is not far away when the government stops bailing out failed banks. It’s better to be prepared for this eventuality and safeguard one’s hard earned savings.
(Dr Sampath Iyer is a retired banker with over 30 years of experience. He retired as a Senior VP from a very large private sector bank. He is also a visiting faculty in a few colleges and business schools taking sessions on a range of topics including banking and personal investments. )
Banks, I am afraid to say, don't know how to handle digital resources. I was a customer of Vijaya Bank which was acquired by BoB. Now BoB forced me to surrender my VB credit card and gave me a BoB. Now I am receiving daily spam messages from them. Digital media has become the coronavirus of banking.
The contract person who met me in the VB (BoB) branch pleaded with me to use my BoB because with every credit card transaction that I indulged in, he would get an incentive. Babu, my husband, was forced to open a fixed deposit in HDFC bank and later he became aware that the girl who sold him the deposit got a 1% incentive because she perusaded Babu to open the deposit.
This is a very serious issue - the state of banking today. The Government has to do something about it instead of just adopting cut-copy-paste methods.
We need customer-centric banking reforms that will have far reaching consequences.
Mr Sampath, as a retired banker, what are your views on this?
Regulators are definitely aware and do take steps but customers need to be more vigilant , well informed and follow basics of investment.
Let me give you a case point here. Instances of individual digital frauds are on the rise in spite of massive communication enumerating steps to be taken to prevent phishing attacks.
Regulators, policy makers will do their bit but a customer needs to be very vigilant.
Rana Kapoor of yes bank managed to do that even when there was a rbi member was among the board .. ( as this is the norm for all banks )
Also various rating agencies were giving good credit rating until 2018 ..
And I have no clue how the bank charted accountants or independent bodies were able to show profits every year and publish that online or in the newspapers .
Can anyone share their views on how to identify the good banks now ?