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Why Do People Still Have Deposits in Indian Overseas Bank and UCO Bank?

Aug 16, 2016


That we are financially illiterate nation is a given. But even with this disclaimer I am sometimes amazed at how lackadaisical people are when it comes to their money.

Take the case of two public sector banks: a) Indian Overseas Bank b) UCO Bank. Recently, both the banks declared results for the three-month period ending June 30, 2016. As of June 30, the bad loans of Indian Overseas Bank amounted to 20.48 per cent. And that of UCO Bank were at 17.19 per cent.

This basically means that close to one-fifth of the loans given by these banks have not been repaid. The question is how do these banks or for that matter any bank, give loans? A bank raises deposits and then gives out those deposits as loans.

Of course, if the loans of a bank are not being repaid, it's chances of returning deposits are also low. At least, that is how things should work in theory. But that is not the case primarily because everyone knows that a government is not going to let a public sector bank go bust. (Actually, the government won't let even a private sector bank go bust, but that is a story we will leave for another day).

And this explains why people still have their money deposited with these banks. Take the case of Indian Overseas Bank. As on June 30, 2016, the total deposits with the bank stood at Rs 2.18 lakh crore, in comparison to Rs 2.32 lakh crore a year earlier. Now that is a fall of 5.85 per cent.

This drop is extremely marginal when one takes into account the fact that the bad loans of the bank have more than doubled during the same period. As on June 30, 2015, the bad loans of the bank had stood at 9.40 per cent of its total advances. What this clearly tells us is that the smart money has started to move out of the bank. But the bulk of the lot continue to hold on to their deposits in the bank.

How do things look for UCO Bank? I couldn't find the deposits of the bank as on June 30, 2016, and hence, have worked with March 31, 2016, numbers, which are good enough to make the point I am trying to make.

As of March 31, 2016, the total deposits of UCO Bank were at Rs 2.07 lakh crore, down from Rs 2.14 lakh crore from a year earlier. This is a meagre fall of 3.4 per cent. During the same period, the bad loans of the bank have jumped from 6.76 per cent to 15.43 per cent.

While the investors in the stocks of these banks have realised the true situation that these banks are in, the same cannot be said about the depositors. The explanation for this is fairly straightforward. Most depositors do not keep track of the state of the bank they have deposited their money in, especially if it happens to be a public sector bank.

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The de facto assumption is that money deposited in a public sector bank is safe, which it is. Nevertheless, if at all there is trouble, there might be transitional problems and during that period liquidity of these deposits might be an issue.

Also, for all the risk that depositors are taking on by investing in these banks, what is the extra return that they are earning? The interest on fixed deposits of UCO Bank for a period of one year or more vary between 7.25 per cent and 7.5 per cent. The interest rates on fixed deposits of Indian Overseas Bank for a similar period vary between 7 per cent and 7.25 per cent.

The State Bank of India, the largest public sector bank, offers interest rates between 7 per cent and 7.5 per cent, for fixed deposits of one year or more. Hence, the State Bank of India offers more or less the same interest rate as Indian Overseas Bank and UCO Bank, do.

At the same time, it is a much safer bank to have your deposits in given that its bad loans as on June 30, 2016, stood at 6.49 per cent of its total advances. They had stood at 4.29 per cent as on June 30, 2015.

So, the bad loans of State Bank of India are lower than that of both Indian Overseas Bank as well as UCO Bank. At the same time, they have gone up at a much slower pace. In case both Indian Overseas Bank and UCO Bank, the bad loans have more than doubled over the last one year. This is clearly not the case with State Bank of India.

Hence, even those depositors who like to hold their deposits in government owned banks, the State Bank of India, is a much safer bet. Also, it is the biggest government bank and the government has the most interest in keeping it going.

The only place human beings are known to be rational are in theoretical economics. In real life they clearly not. The above example clearly shows us that. The reasons of people holding on to deposits in Indian Overseas Bank and UCO Bank can be multiple

The first, is that they don't know that the banks are in a bad shape. The second, is that they do know that banks are in a bad shape, but they also know that government banks don't fail. The third, is that they have always had their deposits in these banks and are friendly with the people who run the branch they have their deposits in.

Nevertheless, none of these reasons is a rational one because the fixed deposits of these two banks do not pay a higher rate of return for the extra risk that the people are taking on.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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12 Responses to "Why Do People Still Have Deposits in Indian Overseas Bank and UCO Bank?"


Dec 23, 2017

Is it advisable to buy IOB shares now. it went on 11 years low. will it pick up in future. kindly advise. 9941571756.

Like (1)


Sep 2, 2017

9056992023 iand my family has a fix depoist of rs 40 lakh in uco should we with draw our money

Like (12)

paresh shah

Oct 9, 2016

One reason is that the deposits were at a higher rate of interest, which you cannot get now. Moving the deposits would result in a loss. It is also highly unlikely that the government will allow the bank to fail. Irrational ??

Like (12)

ravisankar K

Aug 22, 2016

Good article. Both IOB (Indian overseas bank) and Indian bank are badly run (they are south based nationalised banks). Both these banks need drastic steps to improve performance. They are making losses for decades.
These nationalised banks are surviving only because of government support. Their service standards are also very poor. SBI is much better in terms of customer service.

On the other hand ,the private banks in the south are much better performing (City union bank / Lakshmi vilas bank etc.,).

I hope the new RBI governor will continue to be stringent on the NPA like his predecessor.

Like (12)

stephen Fernando

Aug 18, 2016

Mr. Vivek kaul,
This is with reference to yourabove article. You have failed to distinguish between bad loans and NPAs. As pointed out by you it is not correct to say that 20.48% of IOBs advances are bad loan. A bad loan is one which cannot be recovered and 100% provision is made. NPA is a temporary phenominon where recovey is not forthcoming more than 90 days. Say if there is a loan of Rs.10 lacs with 120 moths instalment of Rs 10,000 each. If there is an overdue of Rs. 30,000(3 instalments) the entire Rs 10 lacs is classified as NPA. This doesnot mean that the bank will loose the entire 10 lacs.When the OD is recovered the entire 10 lacs will come out of NPA will come out and the interest not booked on this 10 lacs as well as the provisions made on this account will go to bank.s profit.Hence If no recovery is forhcoming tjere will be sevurity backup for realisation besides legal courses to attach and recover from other assets of the borrower.There will be some delay in realisation and booking immediate profitability.Ours being a country more than 70% of people depends on Agrl income which is seasonal the NPA concept adopted by developed. Industrialised Western countries do not suits to our banks. Hence we neednot judge our bank.s performances only on NPAs which will be temporary.

Like (4)


Aug 17, 2016

Sir, Your article is very informative and interesting as a detailed analysis has been made. Thanks to our RBI Governor Sri R.R. (whom we are likely to miss, who took lot of initiative in the area of N.P.As / cleaning of Banks Balance Sheet. But for that, these alarming figures of NPAs would not have been disclosed by the Banks for few more years. Public of late are also educated and aware of the ongoing situation in the Banking industry. But they are helpless and forced to protect their hard savings in PSBs with a fond hope that their money is safe and guaranteed by the Government. In the past also several Private as well as PSBs have been merged with other strong Banks and there appears to be no instances of depositors money lost. Therefore, there are no likely chances of public withdrawing entire deposits from the Banks either Private Sector or PSBs, but there are chances of diverting portion of funds to other portfolios like SIPs, Equity, Mutual Funds, GOI Bonds, Real Estate etc. etc.
I conclude mentioning that your articles are very interesting to read.

Like (4)


Aug 17, 2016

Mr. Vivek,

Your above article completely reflects my mind. I am a conservative investor in my late 40s and have most of my savings in nationalized banks. I would be most obliged if you could kindly share your thoughts on my below queries:

1. The RBI floats 8% GOI Bonds. Do you feel this is a rock-solid safe investment and once could relax after having invested in these?

2. You have mentioned that a Government would not allow a PSB to crash - nor a private bank. This was the case so far. The Government merged banks like Nedungadi, Global Trust and Bank of Madura with bigger banks. That was possible because there were only a few such cases. Now the bigger PSBs (SBI, PNB, BOB, UBI, CANARA, BOI) and ICICI in the private sector are in doldrums and the banking industry itself is reeling under 13 LAKH CRORE BAD LOANS pressure. As you rightly pointed out in another article, the fiscal deficit would go over the roof if the government has to repay all the depositors.

3. A bank manager explained to me that about 35-40% of the fixed deposits are retained by the RBI and the bank gets access only to the balance 60-65%. This is on account of SLR/ CRR and other Government loans. This being the case, is there a chance for banks (public or private) to default on deposits repayment?

4. The Government has guaranteed only Rs. 1 lakh per bank, per person by way of deposit insurance. What would happen to amounts above Rs.1 lakh if the bank crashes?

5. Another point is, the Government holding in IOB is huge, higher than what it holds in other PSBs. This being the case, do you still feel that SBI would be a safer bet?

Like (1)


Aug 17, 2016

Vivek as usual you have put it very rightly.4th reason to some extent branch manager selling deposits saying that they are covered by Insurance.
IOB being a south based bank southerners feel more comfortable to deal with IOB ,but this should not be thelogic for such action but unfortunately it is.

Like (1)


Aug 16, 2016

It's nice to read your article on the performance of IOB, UCO and SBI. Could you theow light on the performance of private banks like ICICI, Axis Bank, Karur Vysya Bank etc., Is it safer to keep FDRs in Private Banks.


C N Swamy

Like (2)

Penugonda Prabhakar

Aug 16, 2016

Iam Penugonda prabhakar who is loan took in overseas bank, UCO bank and some cost kept in given to lone. which kept in bank interest time to time paid. you consider take action.

yours Lovely
Penugonda Prabhakar

Like (2)
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