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 capitalized and won’t suffer a similar fate.
Click here to read the FM's views.
wealth cuts through the jargon and tells you what this really means for you.
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).
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.
Next page: Dos and don'ts of choosing a bank
Read: What are the various bank charges?
Photograph: Mario Tama/Getty Images
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