Oct 12, 2008

Economic crisis and your saved money in Bank – How much secure is that!

In this time of economic crisis, when a news come about any bank that it is going to be bankrupt then all depositor started running withdrawing their money from bank. It is quite natural. People save their hard earned money in bank for bad times.
Indian Bank is not in that bad shape currently because as ours is growing and young economy and our bank’s regulator is not that risk taking. So, it provides more security than foreign counterparts.
It is difficult to be calm in this crisis for hard earned money, but you can be aware of the RBI policy about Bank.

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).

In an interview with CNN IBN, 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.

Foreign 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.

After reading this you may not have assured of your money- whether it is safe or not, but you may have got little idea of RBI regulation for banks. J

Source: moneycontrol.com