Why Putting Your Hard-Earned Money In Bank FDs May Not Be Safe   Feb 19, 2018


Why Putting Your Hard-Earned Money In Bank FDs May Not Be Safe

What’s wrong with India’s state owned banks nowadays?

Sure you have suite of answers!

The real challenge is to find what’s right with them.

Given the on-going PNB (Punjab National Bank) episode, nobody will believe that the problem of Non-Performing Assets (NPAs) is a result of poor loan underwriting. Scams and the abuse of power seem to be the biggest reasons for the current woes of asset quality with Public Sector Banks (PSBs). 

Also, trusting PSBs with your hard-earned money would be equally difficult for many of you—you never know, PNB might just be the tip of the iceberg.  In fact, the brazen behaviour of bank officials, their collusion with business houses and the corporate-political nexus makes the frauds unfathomable for now.

Prima facie, the recently reported fraud at PNB which is worth an astronomical value of Rs 11,400 crore won’t add to its NPAs. Although Mr Nirav Modi is a debtor of PNB, the presiding drama is about Letters of Undertakings (LoUs)—a guarantee given by PNB to overseas banks for Mr Nirav Modi’s group companies.

Collectively, All PSBs including PNB, have a collective exposure of over Rs 17,000 crore to Mr Nirav Modi’s group companies.

This exposes another kind of robbery of taxpayers’ money.

So far, Indians thought, politicians pressurise bank officials to sanction loans, but the “LoU” aspect pointed out that governance issues at PSBs are deep-rooted and tough to get away with. Depositors will be in a miserable condition if PSBs pull the rug out from under their feet (by losing money in scams).

While UPA and NDA are mudslinging each other on the PNB scam, the facts that have come forth suggest that, none of them can shrug off their responsibility. These malpractices have been happening over the last six-seven years ….and it’s now tough to convince the world that all’s well with PSBs in India.

Ironically, PNB had won the award for its (“so called”) excellence in vigilance thrice in last three years.  This is just like a person in ICU receiving a certificate of fitness.

If you remember, the social media platforms were buzzing with fear-mongering posts about the Financial Resolution and Deposit Insurance Bill (FRDI), 2017 until recently. This caused anxiety among gullible readers regarding the ‘bail-in’ clause in the Bill. 

It’s widely believed that many banks might face insolvency due to the on-going problem of Non-Performing Assets (NPAs). It’s also considered that the ‘bail-in clause’ might enable such banks to seize unsecured deposits, i.e. those above the threshold limit of Rs 1 lakh; in the event of the shortfall of risk-capital.

Essentially it meant that depositors might lose unsecured deposits and would have to forgo a part of the deposit or settle for equity in the same bank. Isn’t this frightening — especially considering the awful state of state-owned banks?

What’s the bail-in clause?

It’s precisely the opposite of ‘bail-out’— the method of using taxpayers’ money (or other external resources) to shore up the capital base of a troubled bank.

The bail-in offers a troubled financial institution a chance to negotiate with its creditors (depositors in the case of banks) to restructure loans and agree to forgo a part of claims or at least roll them over for a period of time. 

This method became popular only in the aftermath of the global financial crisis. Due to the sheer size of failures, ‘bail-outs’ can be costly, unviable, or politically difficult to reach in some cases.

Although the Finance Minister, Mr Arun Jaitley rushed in to clarify that depositors’ money was safe with PSBs, the quantum of the PNB fraud reduces the FRDI, in principle, to a draconian law.

From the fame of “Likhte likhte love ho jaye” (you would fall in love while writing with the pen) Rotomac Pens suddenly became “dekhte dekhte gull ho jaye” (a fly-by-night) company. This company has allegedly defrauded the PSBs for over Rs 800 crore.

Looking at the magnitude of unethical operations and unprecedented flow of bad information, it looks like the PSBs will, in all probability, face more troubles in the foreseeable future.

So, the time has come to ask yourself a question again: Are deposits with banks really safe?

If ‘Sarkari’ status enjoyed by PSBs is blindfolding you, it’s high time to shed the cocoon of misbeliefs.

Here are some promising investment avenues, as bank FDs too are turning risk:

Debt and money market mutual funds

Debt mutual funds aren’t safe either, but if you have a low to moderate risk profile, they can be considered.

Presently, while allocating your investible surplus to debt mutual funds, taking dominant exposure towards the longer end of the yield curve would be imprudent. It can be perilous, since most of the rally has already been captured at the longer end of the yield curve and there isn't much steam left.

In fact, short-term maturity papers are turning attractive and fund houses too are aligning their portfolio accordingly.

Ideally, you’ll be better-off if you deploy your hard-earned money in short-term debt funds; but ensure you’re giving due importance to your investment time horizon, asset allocation and diversification. Consider investing in short-term debt funds for an investment horizon of upto 2 years.

If you have an investment horizon of 3 to 6 months, ultra-short term funds (also known as liquid plus funds) would be the most suitable.

And if you have an extreme short-term time horizon (of less than 3 months), you would be better-off investing in liquid funds.

Tax-free bonds

Likewise, tax-free bonds are a good long-term fixed income option, especially if you are in the highest tax bracket and able to subscribe to the bonds in the primary market (as and when they are offered).

You can buy and sell these bonds in the secondary market; however, liquidity can be an issue. If you choose to sell the bond before its maturity and if there are no buyers on the exchange, liquidity will be found wanting. 

Corporate deposits

A few highly rated corporate deposits and bonds may also yield better returns than bank FDs. But make sure you study the company’s financials before investing, as the risk of default can’t be ignored. This will save you from the financial shocks.

Equity mutual funds

If you hold a high risk appetite and wish to address some of your long-term financial goals: your children’s future – their education and marriage needs, or your retirement, among a many others and have an investment time horizon of at least five years, the Systematic Investment Plan (SIP) in equity mutual funds can prove worthy, owing to the benefit of rupee-cost averaging and power of compounding

But don’t get carried away by the exuberance; instead invest sensibly by carefully selecting mutual funds that have displayed a consistent performance track record and are from mutual fund houses that follow strong investment processes and systems.



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