Indian savers may bury cash in 'panic' over banks
Thursday, 16 October 2008
M.C. Govardhana Rangan of Bloomberg
HOUSEWIFE Sumathi Govindaraj has had an account at ICICI Bank Ltd., India's second-biggest lender, for four years. Lately she transferred her life savings of more than 200,000 rupees ($4,100) to state-run Indian Bank after- hearing rumors ICICI could be in trouble.
The mother of two from the southern city of Coimbatore thought her money would be safer at a government institution. She didn't know that deposit holders at all Indian banks get the same official guarantee: 100,000 rupees per account.
"I moved all my money thinking it is all safe; how is it that only 100,000 rupees is insured?'' asked Govindaraj, 36. "The only option seems to be to put the money in a pot and bury it in the backyard.''
Savers, spooked by concerns the global credit crunch may squeeze Indian lenders, are demanding the government increase deposit insurance that was last raised in 1993. In the past five years, household savings in India nearly doubled to 9.85 trillion rupees as the country's economy boomed. Indian officials haven't followed their counterparts in Europe, the U.S. and Australia in raising guarantees, arguing that the nation's banks are sound.
"Investors are panicking,'' said P.G.R. Prasad, an adviser at Bangalore-based Wealth Solutions Pvt., which provides financial services to companies. "It doesn't make any difference whether it is in a public sector bank, or a private sector bank; deposits aren't fully guaranteed.''
'Well Capitalized'
On September 30, the Reserve Bank of India released a statement saying ICICI was "well capitalized'' and had sufficient funds to meet the requirements of depositors after media reports about the Mumbai-based bank's financial position led some customers to make withdrawals. ICICI Chief Executive Officer K.V. Kamath said the speculation was "baseless and malicious.''
Words may not be enough to calm consumers, said Yashwant Sinha, a lawmaker from the opposition Bharatiya Janata Party, who served as finance minister in the previous government.
"It's no comfort for people who have larger sums of money,'' he said. "There is a case for increasing'' deposit insurance.
In 1962, India became the second country after the U.S. to insure deposits following a series of bank failures, according to the central bank's Web site.
The Deposit Insurance and Credit Guarantee Corp., owned by the Reserve Bank of India, increased the insurance limit to 100,000 rupees in 1993. Since then, insured deposits have risen almost 11-fold to 18 trillion rupees, according to the agency's annual report. The number of accounts increased to 1.03 billion from 354.3 million.
'Pay Premium': The limit could be raised if savers paid a premium to insure deposits beyond 100,000 rupees, said Prakash G. Apte, one of nine board members at the Deposit Insurance and Credit Guarantee Corp.
"There's no way government could provide free insurance to all this,'' said Apte, professor of economics and social science at the Indian Institute of Management, Bangalore. "Start charging an insurance premium and any amount can be insured.''
Sanjay Shah, a 34-year-old executive at a plastics maker in Baroda, early this month shifted his personal account to State Bank of India from ICICI. He said the cap should be raised to 1.5 million rupees per account.
"If that doesn't happen I will open multiple accounts in multiple banks,'' he said.
Such concerns are unfounded, said Sujan Hajra, chief economist at Mumbai-based Anand Rathi Securities Ltd.
"We haven't had an incident for decades where a depositor was not saved during bank failures,'' he said.
Troubled Lenders: Since 1969 the government hasn't allowed any banks to fail, merging 31 troubled lenders with stronger, mostly state-run, institutions to protect deposits, according to the central bank. Most recently, Industrial Development Bank of India Ltd. acquired unprofitable United Western Bank in 2006.
There's no need to increase deposit protection, said M.S. Sundara Rajan, chairman of Indian Bank, the nation's 10th largest by market value, because domestic lenders aren't short of cash like their overseas counterparts.
"You need high insurance only when you are driving rashly and there's a possibility of an accident,'' Rajan said. "Our banking system is rock solid.''
Even so, India has taken action to boost liquidity. On October 10, the central bank injected about 600 billion rupees into the financial system by cutting the cash reserve ratio, the amount lenders must store with the bank, to 7.5 per cent from 9.0 per cent.
A day later, central bank Governor Duvvuri Subbarao told the latest meeting of the International Monetary Fund in Washington that the "efficacy and coverage'' of deposit insurance was a relevant issue. That's the only comment the bank has made on the subject.
Raised Levels: Governments from the U.S. and U.K. to Australia and New Zealand raised protection levels to prevent bank runs as the financial system teetered near collapse after global losses of more than $630 billion linked to U.S. subprime mortgages.
Indonesia has increased its deposit guarantee 20-fold to 2.0 billion rupiah ($204,000) per individual.
Increased protection for individual investors is only fair, said R. Kalyanaraman, a director at IMNC Logistics Pvt. in Navi Mumbai. He doesn't invest in stocks, mutual funds or real estate because he thinks it's too risky.
"When I don't gamble for high returns, the government should ensure that all my money with banks is safe,'' said Kalyanaraman, 42, who has more than 500,000 rupees deposited.
Housewife Govindaraj agrees.
"It is going to be tougher on old people than me,'' said Govindaraj. "Retired people want safety and they don't want to rely on their kids' income.''
HOUSEWIFE Sumathi Govindaraj has had an account at ICICI Bank Ltd., India's second-biggest lender, for four years. Lately she transferred her life savings of more than 200,000 rupees ($4,100) to state-run Indian Bank after- hearing rumors ICICI could be in trouble.
The mother of two from the southern city of Coimbatore thought her money would be safer at a government institution. She didn't know that deposit holders at all Indian banks get the same official guarantee: 100,000 rupees per account.
"I moved all my money thinking it is all safe; how is it that only 100,000 rupees is insured?'' asked Govindaraj, 36. "The only option seems to be to put the money in a pot and bury it in the backyard.''
Savers, spooked by concerns the global credit crunch may squeeze Indian lenders, are demanding the government increase deposit insurance that was last raised in 1993. In the past five years, household savings in India nearly doubled to 9.85 trillion rupees as the country's economy boomed. Indian officials haven't followed their counterparts in Europe, the U.S. and Australia in raising guarantees, arguing that the nation's banks are sound.
"Investors are panicking,'' said P.G.R. Prasad, an adviser at Bangalore-based Wealth Solutions Pvt., which provides financial services to companies. "It doesn't make any difference whether it is in a public sector bank, or a private sector bank; deposits aren't fully guaranteed.''
'Well Capitalized'
On September 30, the Reserve Bank of India released a statement saying ICICI was "well capitalized'' and had sufficient funds to meet the requirements of depositors after media reports about the Mumbai-based bank's financial position led some customers to make withdrawals. ICICI Chief Executive Officer K.V. Kamath said the speculation was "baseless and malicious.''
Words may not be enough to calm consumers, said Yashwant Sinha, a lawmaker from the opposition Bharatiya Janata Party, who served as finance minister in the previous government.
"It's no comfort for people who have larger sums of money,'' he said. "There is a case for increasing'' deposit insurance.
In 1962, India became the second country after the U.S. to insure deposits following a series of bank failures, according to the central bank's Web site.
The Deposit Insurance and Credit Guarantee Corp., owned by the Reserve Bank of India, increased the insurance limit to 100,000 rupees in 1993. Since then, insured deposits have risen almost 11-fold to 18 trillion rupees, according to the agency's annual report. The number of accounts increased to 1.03 billion from 354.3 million.
'Pay Premium': The limit could be raised if savers paid a premium to insure deposits beyond 100,000 rupees, said Prakash G. Apte, one of nine board members at the Deposit Insurance and Credit Guarantee Corp.
"There's no way government could provide free insurance to all this,'' said Apte, professor of economics and social science at the Indian Institute of Management, Bangalore. "Start charging an insurance premium and any amount can be insured.''
Sanjay Shah, a 34-year-old executive at a plastics maker in Baroda, early this month shifted his personal account to State Bank of India from ICICI. He said the cap should be raised to 1.5 million rupees per account.
"If that doesn't happen I will open multiple accounts in multiple banks,'' he said.
Such concerns are unfounded, said Sujan Hajra, chief economist at Mumbai-based Anand Rathi Securities Ltd.
"We haven't had an incident for decades where a depositor was not saved during bank failures,'' he said.
Troubled Lenders: Since 1969 the government hasn't allowed any banks to fail, merging 31 troubled lenders with stronger, mostly state-run, institutions to protect deposits, according to the central bank. Most recently, Industrial Development Bank of India Ltd. acquired unprofitable United Western Bank in 2006.
There's no need to increase deposit protection, said M.S. Sundara Rajan, chairman of Indian Bank, the nation's 10th largest by market value, because domestic lenders aren't short of cash like their overseas counterparts.
"You need high insurance only when you are driving rashly and there's a possibility of an accident,'' Rajan said. "Our banking system is rock solid.''
Even so, India has taken action to boost liquidity. On October 10, the central bank injected about 600 billion rupees into the financial system by cutting the cash reserve ratio, the amount lenders must store with the bank, to 7.5 per cent from 9.0 per cent.
A day later, central bank Governor Duvvuri Subbarao told the latest meeting of the International Monetary Fund in Washington that the "efficacy and coverage'' of deposit insurance was a relevant issue. That's the only comment the bank has made on the subject.
Raised Levels: Governments from the U.S. and U.K. to Australia and New Zealand raised protection levels to prevent bank runs as the financial system teetered near collapse after global losses of more than $630 billion linked to U.S. subprime mortgages.
Indonesia has increased its deposit guarantee 20-fold to 2.0 billion rupiah ($204,000) per individual.
Increased protection for individual investors is only fair, said R. Kalyanaraman, a director at IMNC Logistics Pvt. in Navi Mumbai. He doesn't invest in stocks, mutual funds or real estate because he thinks it's too risky.
"When I don't gamble for high returns, the government should ensure that all my money with banks is safe,'' said Kalyanaraman, 42, who has more than 500,000 rupees deposited.
Housewife Govindaraj agrees.
"It is going to be tougher on old people than me,'' said Govindaraj. "Retired people want safety and they don't want to rely on their kids' income.''