The trouble with the banking space facing huge stressed assets situation is unlikely to be resolved anytime soon. And the problem has only aggravated after the recent high value PNB and such similar PSB scams have come to the shore. The stressed assets situation of the Indian banking system amounts to Rs. 10 lakh crore and the gross NPAs for the financial year ending March 2018 are estimated to increase to 10.5% as against 9.5% in March 2017.
So, to what extent should the depleting health of the banks and more so PSBs and these recent scams should worry you as a depositor. Here is a breakdown on the situation:
Safety of depositors' money is ensured through DICGC
The Deposit Insurance and Credit Guarantee Corporation (DICGC), an RBI arm provides insurance cover against deposits and the current limit for it is set as Rs. 1 lakh. So, safety to some extent is ensured to depositors. Then the recent Financial Resolution and Deposit Insurance (FRDI) Bill, 2017 which is currently being evaluated by the parliamentary standing committee may provide for greater flexibility to increase the cover against deposits of bank customers.
Though, the government will not let any of the banks fail and hence to restore the financial health of these stressed banks has even invoked Prompt Corrective Action (PCA) against 11 banks including Dena Bank, Central Bank of India, Bank of Maharashtra, UCO Bank, IDBI Bank, Oriental Bank of Commerce, Indian Overseas Bank, Corporation Bank, Bank of India, Allahabad Bank and United Bank of India. This has come in as some of the important benchmarks that include capital adequacy ratio or NPAs at these banks worsened.
Bail-in clause proposed in FRDI Bill, 2017
After the FRDI Bill, 2017 was proposed Finance Minister Arun Jaitley assured depositors that their deposits with the banks are safe. But given the quantum of these frauds that are unearthing one after the other, one cannot forget the bail-in clause in FRDI Bill which shall enable the banks to negotiate with the creditors of the banks that in the case are depositors to forego a part of the deposits with them (unsecured deposits over the threshold limit of Rs. 1 lakh) or settle for some equity in the PSB.
Slippages and increase in non-performing assets to increase lending rates and likewise impact deposit rates
While the deposits are secured with banks unless the bail-in clause comes into play, it is to be noted that banks' ill-health indirectly impacts you as they tend to raise interest rate on borrowings and simultaneously cut down on deposit rates.
The rate hike on lending is evident now as the banks have increased the MCLR or marginal cost of lending rate. MCLR regime was introduced in the year 2016 to better pass on interest rates in the economy.
So, even in the worst of scenario, at its least there is a chance of default on your deposits as the government will take over the bank to rescue it in such a situation.
Nonetheless, following the rules of asset allocation and diversification shall be the key to safeguard your hard-earned money. So, do look for all possible investment avenues as return and risk have to be both factored in to invest wisely.