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While investors do assume a certain degree of risk when it comes to investing in stocks, they wish to take none of it with their bank deposits. In our Equitymaster Investor Survey conducted in December 2008 we had asked our readers - Whom do you prefer placing your bank deposits with? The votes showed a trend that was very indicative of investors’ emotion - flight to safety when in trouble!  Public sector banks a safe haven: The precedent that the US government has set in terms of bailing out beleaguered financial institutions in the country seems to have heavily influenced investor confidence in banks that have government ownership. Further Indian PSU banks (with the exception of a few) are known to have less exposure to risky assets and are relatively less aggressive as compared to their private sector and foreign counterparts. Probably that is the reason why majority (52.4%) of the votes were in favour of PSU banks, wherein the government has a majority (minimum 51%) stake. We will not blame retail investors for having the perception that public sector banks are safer as compared to others, when even large corporates, including Infosys, have shifted a large chunk of their deposits from private to public sector banks in the past few months. Infosys has revealed that at the end of December 2008, the company kept 79% (59% on March 2008) of its Rs 77 bn deposits with PSU Banks. International banks (with Indian branches) held 16% (12% in March 2008) while private sector banks hold just 5% (30% in March 2008) of the company’s total deposits. It does not matter: 26% of votes were indifferent with regard to ownership of the banks they place their deposits with. This could also be a case of put your money where it gives you the best yield. However, this could also be dealt with some logic. Thanks to the RBI’s diligence with regard to minimisation of risk exposure for Indian banks there have been no cases of bank defaults in India so far. Further, the fact that Indian banks are mandated to keep some funds with the RBI assures some safety to deposit holders. That is, if the bank has Rs 100 available with itself for lending, it cannot deploy the entire amount for such purpose. If as per RBI regulations, the CRR (cash reserve ratio) is 5% (say) and SLR is 25% (say), the bank must keep Rs 30 out of every Rs 100 of deposits with the RBI and can lend only upto 70% of its total deposits. Also, as per the Banking Act, deposits upto Rs 1,00,000 are insured for every depositor. Having said that depositors must check the capital adequacy ratio (CAR, minimum 10%) and level of non performing assets (NPAs) of their banks. |
| (%) | PSU Banks | Private sector banks | Foreign Banks | |||
| FY07 | FY08 | FY07 | FY08 | FY07 | FY08 | |
| CAR | 12.5 | 12.1 | 12.1 | 14.3 | 12.0 | 13.1 |
| Net NPA | 0.9 | 0.8 | 0.9 | 1.0 | 0.7 | 0.8 |
| Net Interest Margins | 4.0 | 3.6 | 4.1 | 4.5 | 5.2 | 6.0 |
| Return on assets | 0.9 | 1.0 | 1.0 | 1.2 | 2.3 | 2.6 |
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Private sector banks: 17.5% of the respondents continued to place their trust with private sector banks. While there is no reason why they should not do so, especially if they have sufficient comfort levels with the way the bank operates; investors must have knowledge about the ownership and management quality of the bank. While some investors may also prefer private sector banks over the PSU ones due to the former’s technological superiority and better quality of service, they must not compromise on doing sufficient research about the track record of the bank. Cooperative and foreign banks: The takers for deposits in cooperative and foreign banks were just 2% each. This may be due to the fact that each of them have minimal disclosure of their financial performance and that they have very limited franchise. Having said that, investors parking their funds with cooperative and foreign banks must try to verify their credentials, especially parameters like capital adequacy ratio (CAR) and non performing assets (NPAs) before entrusting them with the deposits.
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