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Dear Reader, You Have Been Paying Premiums to Keep Bank Fixed Deposits Safe

Nov 21, 2018

Vivek Kaul

When I moved to Mumbai in 2005, there were three things that I picked up very quickly:

1) Corporates never criticize the government. Within minutes of the budget coming out, they rate it 9.5 out of 10.

2) Fund managers/money managers are perpetually bullish. The India growth story is still strong, 15 years later. The market will keep going up.

3) The third and the most important thing I learned, or rather am still in the process of learning, is that in economics there is no free lunch.

In this piece, we will talk about the third point. Every individual does not have the time and the mental space to understand economics, but if there is one thing that every Indian (or for that matter every citizen in any other country) needs to understand is that there is no free lunch in economics.

I was speaking at a discussion, which was held as a part of Tata Literature Live on Sunday (November 18, 2018). I put simple question to the audience: How many of you have a fixed deposit with a public sector bank?

Given that we were in South Mumbai, fewer hands than I expected went up.

The next question I asked the audience was: Do you think your deposits will be repaid on maturity? Almost everyone said yes, but the conviction of one particular lady in the audience was much more than the others. She said: "Yesssss..."

Now let's look at this in slightly more detail.

Narendra Modi was sworn in as the prime minister on May 26, 2014. On that day, the price of the Indian basket of crude oil was $106.85 per barrel. Soon, the oil prices started falling, and by January 2016, the oil price averaged at $28.1 per barrel.

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While, the price of oil fell by close to 75%, petrol and diesel prices did not fall much. The question is why? This happened primarily because the central government increased the taxes that it collects on petrol and diesel multiple times.

In 2014-2015, the central government had collected Rs 99,069 crore from excise duty on petroleum products, which include petrol and diesel. By 2017-2018, this had jumped to Rs 2,28,907 crore. This was a jump of more than 100%.

The question is what did the government do with this extra money? We will come to the answer a little later in this piece.

The bad loans of public sector banks as on September 30, 2018, stood at Rs 8,68,811 crore. This is a fall of 3% from March 31, 2018. Bad loans are largely loans which haven't been repaid for a period of 90 days or more.

The bad loans rate of public sector banks as on September 30, 2018, stood at 14.08%. This basically means that for every Rs 100 of loans given by public sector banks, Rs 14.08 have been defaulted on. The bad loans rate was at 14.58% as on March 31, 2018.

While there has been a little improvement on this front, on the whole things still don't look very good, especially for banks like UCO Bank, Central Bank, United Bank, IDBI Bank, Dena Bank and Indian Overseas Bank, where the bad loans rate is more than 20%.

Nevertheless, these banks continue to pay the interest on their fixed deposits as well as repay fixed deposits when they mature. How do they manage to do this? Technically, when banks face a default on their loans, they shouldn't be able to repay their deposits as well.

But the fact of the matter is that in the Indian case, banks have continually managed to keep repaying the maturing fixed deposits.

So, what is happening here? Since 2014-2015, the central government, which is the primary owner of the public sector banks, has been continuously investing more and more money into these banks. Between April 2014 and by the end of March 2019, the government would have invested more than Rs 2,00,000 crore in these banks.

Where do you think this money is coming from? From the higher taxes, you and I, have been paying on petrol and diesel, over the last four years. So, every time you buy petrol, or diesel for that matter, dear reader, you are basically paying a premium to keep the public sector bank deposits save, irrespective of the fact that whether you have deposits with a public sector bank or not.

So, this brings me back to the point that there is no free lunch in economics. Someone has got to pay for it. And that someone may or may not be the one having the free lunch. Of course, that doesn't sound good.

Further, as I mentioned earlier there are six banks which have a bad loans rate of greater than 20%. These are Central Bank (21.48%), Dena Bank (23.64%), IDBI Bank (31.78%), India Overseas Bank (24.73%), UCO Bank (25.37%) and United Bank (22.69%).

What confuses me is why are people still banking with these banks? Yes, the government will not allow these banks to default, but given that so many government banks are in trouble, why take the risk?

Also, what is it that these banks are offering that the other public sector banks aren't? If someone can answer that question for me, I would be rather grateful.

One possible answer is that people have locked in deposits at a higher rate of interest and do not want to break it, given that they won't be able to reinvest the money at the same rate of interest. Having said that, for those who are in this situation, it makes sense to move their money away from these banks, as soon as their deposits mature.

This brings me to the bigger question: When it comes to their money, why are people so lackadaisical? We spend so much time and mental space trying to figure out which movie to watch, which restaurant to eat, where to holiday, what gift to give and so on, but when it comes to our hard-earned, anything goes.

Beats me!


Vivek Kaul
Vivek Kaul
Editor, Vivek Kaul Publishing

PS: Now you can follow Vivek Kaul on Social Media and get Vivek's updates on the critical issues affecting the economy and your wallet... as they happen. Follow Vivek on FacebookTwitter, and Google+.

Vivek Kaul is the Editor of the Diary. He is the author of the Easy Money trilogy. The books were bestsellers on Amazon. His latest book is India's Big Government - The Intrusive State and How It is Hurting Us.

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9 Responses to "Dear Reader, You Have Been Paying Premiums to Keep Bank Fixed Deposits Safe"


Dec 5, 2018

Limaye's comment is to the point. Vivek, you need to understand financial literacy of general public, opportunities easily available to them which they are secured and assured of but unfortunately there are non. Risks are everywhere. SIP-MF is yet to see the downturn. Wait for few to give erosion or negative return. Not all or everything come under maverick category.


Neeraj Mishra

Nov 26, 2018

Dear Vivek, Excellent analysis of banks in current scenario. The issue with most FD types is, where else do they keep their money safe? They have no knowledge of markets, even afraid of investing in something that may drop 20% in a day. Experience says that PSB s never default in their FD redemption. A good percentage of younger investors are weaning away from this. That is why MF/ SIP combo is growing by huge numbers.



Nov 23, 2018

Hmmm.. As usual Good article. Read the comment from a retired IA employee , Sir do you understand that the tax payers money was used to protect your Job , and no matter what IA or other PSU employees face termination from service as a punishment for insubordination or poor performance .The Government is protecting your Jobs not Public Interest . Nobody has the spine to clean up the mess and yet these people complain . There was a time when the IA could have been privatized , but the employees resisted that move now they sit at home and enjoy pension for destroying an institution .



Nov 22, 2018

Hi Vivek, I think the answer to your question in the last paragraph is that: The money in the bank is non-tangible to most people. Just imagine if people had entrusted their real estate or gold with the banks, and then one day, if that bank had a NPA of 15% (for discussion, say this NPA is only for real estate or gold) - then people would be very worried about their gold/real estate. Somehow currency digits that appear on people's bank accounts (as seen on their bank passbook or on the online statement) is sensed as a non-tangible entity, and thereby, they have a relaxed approach to it. All other activities that you mention - like "which movie to watch, which restaurant to eat, where to holiday" are tangible activities that pleasure us, and thus people show more interest towards them Love your work ! Arjun


R V Rao

Nov 22, 2018

Why do people trust PSB ? Well they hope that their FD will be repaid when they need it. Fact of the matter is that even some private banks will delay closing large FD. I live overseas and tried to close a large FD with Axis bank. Each time it gave me a message technical error. It took me a week to close after multiple escalations. So poor service and cash flow problem is a problem that extends to some struggling private banks as it does with PSB. People like their banks to be (A) Boring (B) Dependable. Given Government ownership the possibility of a bail in is probably 1% with private banks and probably 0.1% with PSB. Thats a 10x higher probability ?



Nov 22, 2018

The article is saying only half of the story. We pay premium not to keep the fixed deposits safe in the PSUs. But to give loans to the crony capitalist so that they can loot us again in the future. Governments by collecting money from every citizen, lends through banks ( as done before) to capitalists so that they can loot and make the banks again to get money from government( i.e. public). One time with congress and another with BJP. Nothing else. The looter gets changes but the looted (public) remains the same.



Nov 21, 2018

Instead of raising the query about "Why people are lackadaisical " , the article would have been more purposeful , if the author had taken some pains ,carried out some analysis on the performance of share market including performance of debt funds (which were being propagated by the financial analysts /Mutual Fund houses including the author of the article as better alternatives for Fixed Deposits )during the past few months vis-a-vis Fixed Deposits of PSBs.The readers are awaiting suggestions from Mr.Kaul for alternate investment avenues where the safety of principal amount is guaranteed.



Nov 21, 2018

I have retired from a public sector namely India Airlines ( financially destroyed by UPA in general and Praful in particular ). I had a savings account with UCO BANK since pre-nationalisation days. My father had opened it for me to cultivate saving habit. I used to wear half pant and saving bits of my pocket money use to deposit five rupees at intervals ! Now I have moved to Pune from Calcutta and found a UCO Bank nearby. I put my PF money over there in FDs and keep renewing them every three months. This is basically for safety of principal. Returns from other investments can definitely be more but for security it has to be sacrificed. Afterall , till July the leading credit agencies had assigned triple A to IL&FS ! Nothing was known about it's huge debt of 91k crores ! What happened ? Not only it ( or subsidiaries) defaulted but it dragged the share market down by several notches ! Markets are yet to recover fully. It is this uncertainity for which people keep money , atleast a small portion of it , in PSB FDs .

Like (3)

Jayant Chakravarty

Nov 21, 2018

Dear Vivek, In response to the query raised in your last para, I believe that the brains of most people are not hard wired to understand the money or rather its dynamics.

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