Term deposits can be placed with banks as well as corporates. People look at the rates being offered and are concerned about the safety as well. It is said that investments should be gauged on the basis of SLR, which is safety, liquidity and returns. We will discuss the finer aspects of the safety of deposits.
Bank deposits
There is a perception that a bank deposit is with a “Bank”. The implication is that there is a perception of safety in a bank.
Having said that, there is a need to dig deeper. There are two aspects here: one defined and one about perception, or how the system works. The defined aspect is that there is deposit insurance. Banks have to pay the insurance premium and there is insurance provided by the Deposit Insurance Credit Guarantee Corporation (DICGC). The limit is Rs 5 lakh per bank. That is, up to Rs 5 lakh of deposit in a bank, including branches if you spread it out, is safe. To be sure, it may so happen, though rare, that a particular bank has not paid the premium and is not insured in that sense. You may check it out at https://www.dicgc.org.in/FD_ListOfInsuredBanks.html.
The other aspect, as we mentioned earlier, is about perception, or how the system works. There is a saying “too big to fail” or TBTF. When an institution is significant in terms of scale of operations, it is usually strong, which made it grow big in the first place. Even if something was to happen to it, and it came to the verge of failure, there would be systemic repercussions. In such a situation the system comes to its rescue. The “system” here means the government and the regulators. Coming to banks in India, there are public sector banks, there are private sector ones, there are small finance banks, co-operative ones, etc. In PSU banks, there is an implied safety of government ownership. To be noted, it is not a stated guarantee, it is distinct from the Rs 5 lakh insurance mentioned above. An institution with more than 50 percent government ownership would not be allowed to fail. There are instances in the past, troubled PSU banks have been bailed out by the central government.
Then come, in the implied hierarchy, private sector banks. There are leading private sector banks, which are inherently strong, there are ones who qualify for TBTF, and there are the smaller and peripheral ones. This is where you have to be careful. If you are keeping your deposit in a relatively smaller private sector bank, you may like to spread it out and check for DICGC coverage. There have been many cases earlier, the RBI has stepped in and merged a troubled bank with a stronger or bigger one, for the sake of depositors’ safety.
And then there are co-operative banks. Not to paint everyone with the same brush but there have been accidents earlier. If you are falling for the higher deposit rate offered by a co-operative bank, it is better to check for DICGC coverage, spread out to keep it within Rs 5 lakh or do a double check on their fundamentals.
An illustration will make the reality clear. Yes Bank was in trouble when the system stepped in. Though it was not merged with a bigger counterpart, seven leading banks were urged to take a stake to see through the troubled phase. The additional tier I (AT1) bonds were written off, but depositors’ money was safe. Punjab and Maharashtra Co-operative (PMC) Bank depositors went through the motions. Some of the depositors have been paid, and for others, there is a schedule of payment post takeover by a small finance bank. Hence, PMC was somewhere between TBTF and being negligible; the regulator ultimately nudged a bank to take over PMC. For all the news coverage of PMC, there are obscure ones in the nook and corner of the country which do not make it to the headlines, being not so significant.
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Corporate deposits
Coming to corporate deposits, it does not have the explicit and implicit safety nets discussed above. Usually, to cover the risks, the interest rate offered is relatively higher. What is “higher” is a matter of debate. If we take the leading PSU or leading private sector bank as the benchmark, then corporate deposit rates would be higher.
Your reference points would be:
· The credit rating of the deposits offered by the corporate: AAA is the highest, followed by AA+ and so on;
· The goodwill and pedigree of the corporate and management quality;
· If you have the bandwidth, you may check the fundamentals of the company i.e. how strong the business model and financials are.
As long as you are with a blue-chip corporate group, your money is safe, but you have to consider liquidity (premature withdrawal conditions) and management pedigree.
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