The speed of the collapse of Silicon Valley Bank (SVB) has been frightening. In a matter of days, one of the largest banks in the US went down like a pack of cards.
It is interesting to see why SVB collapsed.
The depositors (mainly startups and founders with tons of money) deposited the cash they received from investors with SVB. The bank used large portions of that money to invest in US Treasuries. Generally, the investments were in papers of shorter duration. But in search of higher yields, the bank recently shifted its strategy to invest in longer-term securities. But when the US Federal Reserve started hiking rates at a never-before rate, the bank’s strategy backfired. The market value of its longer-term securities portfolio fell. Then came downgrades, which led to the accelerated sale of portfolio securities.
Not surprisingly, this also spread the word (or perception) that the bank was in trouble and might become insolvent. This led to depositors panicking and rushing to withdraw their money, which is exactly how a ‘bank run’ happens. And SVB, for lack of a softer word, failed.
While the US insures deposits up to $250,000 in case of bank failure, the trouble was that a majority of depositors in SVB were founders of Silicon Valley enterprises who had a lot more than that parked with the bank. And this is where the risk of concentration comes in.
Not just in the US but everywhere. Let’s turn our focus now to India.
Also read: What Zerodha's Nithin Kamath learnt from SVB collapse? 'Have funds...'
Deposit insurance in India
If you are wondering what would happen to Indian depositors if something similar to the SVB collapse happened here, then here is a short explainer.
- The bank deposits (savings account, fixed deposits or FDs, recurring deposits or RDs, etc.) in India are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) up to an amount of Rs 5 lakh per customer/depositor.
- The deposits kept in different branches of the same bank are aggregated for the purpose of insurance cover and a maximum amount of up to Rs 5 lakh is paid.
- But if you have deposits with more than one bank, then the deposit insurance coverage limit is applied separately to the deposits in each bank.
- What this means is if you have Rs 15 lakh in one bank, then only Rs 5 lakh is insured (in case of a bank failure). But if you keep Rs 5 lakh each in three different banks, then each amount of Rs 5 lakh in each of the three banks is individually insured.
For those who keep less than Rs 5 lakh in the bank, the DICGC insurance of Rs 5 lakh is obviously sufficient. But what about those who keep large amounts in bank FDs? And I am not only talking about the well-to-do but also many retirees who invest primarily in bank FDs for safety and assured returns.
Most people don’t even think about losing capital or about the bank’s own solvency status when depositing money in banks. But as we have seen in the recent past in India too, as in the case of PMC Bank, Yes Bank, etc., it is at times like these that people start having second thoughts about the safety and survivability of the banks themselves.
Also read: Gold, silver soar as SVB collapse spurs flight to safety
Which banks to deposit money with in India?
The Reserve Bank of India (RBI) deserves credit for how it handles the Indian banking system. Time and again and in each global crisis, it gets proven that Indian banks are tightly regulated, which ensures that there are no major shocks.
To be fair, most Indian banks are safe, at most times. And the reason is that the RBI monitors them very closely and forces them to take corrective actions proactively if there is something amiss. But still, all banks are not the same.
The RBI itself has identified three systemically important banks (SIBs) in India—State Bank of India, ICICI Bank and HDFC Bank. To put it very simply, as per the RBI, these three banks are too big and too important for the country’s economic system to be allowed to fail if it comes to that.
Please note that the RBI itself, in consultation with the government, would have identified these banks. Also, this doesn’t mean that the rest of the banks are not safe. It is just that the named three are very large and so well-entrenched in the country’s economy that the government will go to any lengths to ensure that they don’t go bad.
How to deposit large amounts in banks
If you have a large amount (much higher than Rs 5 lakh) to put in banks, then here is what you should do:
- Spread your fixed deposits across a few banks. Put at least 60-70 percent in the RBI-identified SIBs. The rest can be parked in other banks that may seem attractive to you as they may be offering higher rates. This is just like spreading your eggs across a few baskets.
- For large deposits where the safety of capital is paramount, there is no point trying to be greedy for a few basis points of extra returns. Simply spread your deposits across SIBs. If not all, then at least a major chunk.
- Since the insurance limit is Rs 5 lakh per depositor, you can also spread money across family members to use the Rs 5 lakh cover for each member instead of just one person.
- I know many people do get tempted by corporate deposits offering very high interest rates (of 9-10 percent) these days. What about those? Remember that the company is offering higher returns to compensate you for the higher risks you are taking by giving them your money. So, risks are obviously higher. This doesn’t mean you should avoid all company deposits. Just be careful of companies offering unusually high interest rates. Limit your exposure to a small part of your portfolio. Also, check the company’s background, credit rating and try to stick with the most reputed and trustworthy names having AAA or similarly high ratings.
- And what about a few of the large cooperative banks that are popular in different geographies? In general, it is better to avoid these.
All said and done, we need to remember that when it comes to putting money in a bank, it is not about return maximisation. Rather, it is about safety and capital preservation. So there is no point in taking unnecessary risks. Just stick to a few of the larger private and public banks only.