Safe investingThe depositors of Punjab and Maharashtra Cooperative (PMC) Bank Limited (Mumbai, Maharashtra) can only withdraw a maximum Rs 1,000 of the total balance in every savings bank account or current account or any other deposit account. These restrictions have been put for six months, according to Reserve Bank of India (RBI). This development is causing tremendous pain to depositors of PMC Bank, especially those who kept a lion’s share of their savings in this bank. The list of affected persons includes senior citizens, young persons, widows. The bank has over Rs 11,000 crore of deposits. The problem with PMC Bank: bad loans.

Preventing depositors from accessing their own hard-earned and post-tax money is a virtual crime, and that too for no fault of theirs. PMC Bank depositors are shocked. Depositors feel they have done no wrong and why should depositors be blamed for mistakes committed by management. But have depositors made no mistake? Unfortunately, depositors have made mistakes. The situation befalling PMC Bank depositors could be faced by any bank, big or small. Thankfully, everyone can minimise this mishap with four simple steps.

The PMC Bank mishap: What happened

An SMS from PMC Bank came to most bank customers. It reads:

“I, Mr. Joy Thomas, M.D., regret to inform you that your PMC Bank has been put under regulatory restriction under Section 35A of B.R. Act by RBI for a period of 6 months due to irregularities disclosed to RBI. As the M.D. of the Bank, I take the responsibility and assure all the depositors that these irregularities will be rectified before the expiry of 6 months. All efforts are made to remove the restrictions by rectifying the irregularities. I know it is a difficult time for all of you and an apology may not restore the pain you are undergoing. Please co-operate with us. We assure that we will definitely overcome this situation and stand strong.”

Separately, RBI has confirmed that via a directive dated September 23, 2019, it has placed the Punjab and Maharashtra Cooperative Bank Limited, Mumbai, Maharashtra, under directions. Also, PMC Bank without prior approval in writing from the Reserve Bank, will also not be able to grant or renew any loans and advances, make any investment, incur any liability including borrowal of funds and acceptance of fresh deposits, etc. “The directions shall remain in force for a period of six months from the close of business of the bank on September 23, 2019,” the RBI said.

Steps to avoid PMC Bank type situation

When a bank stops depositors from accessing their own hard-earned money/savings, such a piece of news obviously creates a panic among all. We have seen such messages floating around Facebook, WhatsApp, Twitter, and other social media platforms. Many depositors say that they are sure no bank is safe. That is a bit of an over-reaction, to say the least.

Depending on your thinking, you can take all the below mentioned four steps to avoid a PMC Bank mishap in the future.

1. Do not keep all your savings/ majority of savings in one bank account

We understand it is easy for you to operate one bank account. However, keeping all your key savings in one bank account is inviting trouble.

When you deposit money to a bank, you become a lender. Would you want to give all your money as a loan to one single person? The answer is NO. Then, why do you want to keep a majority of your savings in one bank? In case a PMC Bank like situation, you will have virtually zero access to the bulk of those savings for at least 6-12 months. This can set off a major cash-flow crisis for you, in case you depend on FD interest income or money kept in banks forms a significant fuel of your household expenses.

Always bear in mind that each depositor in a bank is insured up to a maximum of Rs 1,00,000 (Rupees One Lakh) for both principal and interest amount held by him/her in the same right and same capacity as on the date of liquidation/cancellation of bank’s licence, or the date on which the scheme of amalgamation/merger/reconstruction comes into force. This means under worst conditions, you will only get Rs 1 lakh back.

It does not matter if you keep Rs 1 lakh in different branches. The deposits kept in different branches of a bank are aggregated for the purpose of insurance cover and a maximum amount up to Rs 1 lakh is paid.

2. Keep your deposits in the 3 systematically important banks 

In the hunt for higher interest rates, depositors often open bank FDs in many new and small banks. The problem with new and small banks is that they are too small, and a big disruption can bring them to their knees very quickly.

For instance, it is being speculated that one of the reasons for RBI’s punitive action against PMC Bank was a loan of Rs 2,500 crore to the now-bankrupt real estate firm Housing Development and Infrastructure Limited (HDIL). This is why depositors must trust only a few banks, and not make decisions based on FD interest rates alone.

SBI, ICICI Bank, and HDFC Bank continue to be identified as Domestic Systemically Important Banks (D-SIBs) by the RBI. These are the only three banks in India with this status. These banks are kept under strict RBI supervision and also are expected to take more measures than others to keep their business safe. Being a D-SIB, these banks are expected to be much safer than others, especially small cooperative banks.

Of course, the deposit insurance rules for SBI, ICICI Bank, and HDFC Bank are no different than other banks. If things get worse, you can get a maximum of Rs 1 lakh from each bank.

3. Diversify your savings pool to include RBI bonds, safest liquid funds

Given that there are not many banks that have systematically important status, if you have more savings, the only option left for you is to diversify. One of the ways could be to keep money in PSU banks, which are directly owned by the government. However, with the recent merger exercises happening in PSU banks, the number of PSU banks is going to reduce sharply. Also, the service levels of PSU banks are still not up to the mark. Hence, many customers do not prefer PSU banks.

How do you diversify then? A good way is to keep your money in different safe instruments. One option is 7.75% per annum Savings (Taxable) Bonds. These allow customers to make convenient investments with low-risk returns. The features and benefits of the RBI savings bonds include the option of choosing between cumulative and non-cumulative bonds, high-interest rates, and a longer maturity period.

There are also corporate deposits/bonds available from trusted companies like the Tata Group. While these bonds are not bank FDs (in terms of interest and principal protection), a company like Tata has no recorded history of default ever. It remains trust-worthy.

Safest liquid and overnight funds are also an option. Liquid funds and overnight funds are two types of debt mutual fund. These are the safest categories in debt MF mart. Before you invest in such funds, pay attention to the investments made by those schemes. Invest in only those schemes that limit their investments to Government Securities, Treasury Bills and Commercial Paper/ Certificate of Deposits issued by AAA-rated PSU entities (Public Sector Undertakings). Avoid liquid funds and overnight funds that invest in private corporate debt.

4. Invest directly in Government Securities (G-Secs)

Some online platforms allow you to invest in Government Securities. This is not advertised much, but from a safety perspective, G-Secs are extremely good. Unlike other fixed-income products like bank FDs, debt funds that carry credit risk, G-Secs are guaranteed by the Government of India. You can often get better returns than bank FDs, and that too with a sovereign guarantee.

By purchasing G-Secs directly, you can lock in attractive interest rates with G-Secs from 91 days up to 40 years. Bank FDs have a maximum tenure of 10 years. Also, with G-Secs there is no tax deduction at source like bank FDs. You can pay taxes as per your income tax slab at the end of the financial year.

After buying online at a registered platform, G-Secs will be credited to your demat upon successful allotment and all interest payments will be credited to your bank account. G-Secs pay interest twice a year. Finally, upon maturity, you will also get back your principal amount. G-Secs minimum investment is somewhere about Rs 10 lakh.

Disclaimer: Views expressed here in this article are for general information and reading purpose only. They do not constitute any guidelines or recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide/investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument.

Author
Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. He can be contacted on kumarsroy@rupeeiq.com