Wealth Special: How safe is your bank? | A must read

Huge investment banks in the US have gone down under and there are rumors that some Indian banks may be in trouble.

The Finance Minister has assured that India’s economy is safe. He also went on record to clarify that our banks are adequately capitalised and won’t suffer a similar fate.

Here’s cutting through the jargon to tell you what this really means.Is your bank safe?

"Just because some bank somewhere in the world fails, doesn't mean the same thing will happen here," says investment advisor Sandeep Shanbhag.

Bangalore-based chartered accountant Ketul Shah explains, “Banks raise money from depositors and lend or invest it to earn profits. He says, “The bank can lose money if the lending is improper or investments are risky. So, your money is as safe as your bank’s lending or investments.”So are the bank's lending and investments safe?

As the FM points out, the banks are well capitalized. What does this mean? It simply means, that the RBI lays down norms for banks to follow and these regulations will ensure that depositor's money is safe. Here are some of the regulations:

- Banks cannot lend more than a certain amount to unsecured loans, that is, loans that are not backed by a mortgage or lien. Common examples of these are personal loans, credit cards, etc. Even loans against shares are risky because the mortgage in this case would be the shares which are volatile.

- The RBI's monetary policy defines the limit to which banks can invest in the stock market. It means that banks can't invest more than that amount in equity shares, convertible debentures, mutual funds etc.

- Banks have a limit on the use of foreign funds (either foreign direct investment or foreign borrowing). This ensures that during times of crisis, even if foreign players pull out their money, the bank is not substantially affected.

- Banks have strict audit and disclosure requirements. This keeps a check on the bank's lending and borrowing.

- Banks must maintain a minimum capital as a buffer against any unforeseen risk. Banks also need to keep liquid funds and these are defined by the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR).

On a special CNN-IBN show, CNBC TV 18's banking editor Latha Venkatesh, explained, "For every Rs 100 a bank collects as deposit, Rs 25 will have to be kept with the government as bonds. Governments cannot default, so Rs 25 is anyway safe. Another 8.5 per cent cash should be kept with the RBI, so that is safe again. Lehman Brothers lent 40 times its capital as loans and Goldman Sachs lent 27 times it capital but India is nowhere near that kind of cowboy lending"

In addition to these regulations, financial planner Arvind Rao explains, "For further security, the government introduced 'deposit insurance', which secures your bank deposit up to Rs 1 lakh."

All commercial banks including the branches of foreign banks functioning in India, local area banks and regional rural banks are covered under the deposit insurance scheme.

PAGE_BREAKForeign banks?

Shanbhag explains that foreign banks that have subsidiaries in India are safe. However, those that are headquartered abroad and only have branches here will be different. "If their operations fail there, then most certainly their operations here will become questionable," he says.

In such case, the bank's future would depend on the respective governments. For instance, Venkatesh explains that the British government has gone all out to reassure its banks in a big way. "I assume that this assurance applies to branches in India," she said.

Inspite of all the guidelines and protection, it would only make sense for you, as depositors, to exercise caution while investing in banks. Here are some dos and don'ts.Dos

Do not panic. Restructure your savings. In case your deposits are with ‘unsafe’ banks, move them to a good reputed public or private sector bank.Smart tip: You cannot gauge the safety of a bank by its name; for this you need to read balance sheets, audit reports and disclosures.

Check the Reserve Bank of India’s (RBI) norms for banks’ borrowings and lending and see if your bank adheres to them. You can access the bank's website for this information.

Although this calls for some time consuming research, nothing is ever tiring when it comes to your own money.Don'ts

“Simply stay away from co-operative banks,” continues Shah, “since they are very unpredictable. A reminder would be the famous Madhavpura Mercantile Co-operative Bank – Ketan Parekh case.”

Though these banks are also subject to the same regulations and guidelines, their affairs are, sometimes, not professionally handled. Arvind also cautions, “Failing co-operative banks is not a new thing.”Disclaimer: While we have made efforts to ensure the accuracy of our content (consisting of articles and information), neither this website nor the author shall be held responsible for any losses/ incidents suffered by people accessing, using or is supplied with the content.