Recent incidents of several banks going down under and their depositors suffering hardships have brought out some anomalies in our banking system and economy in general. The model of banks we have i.e. depositors save their money and deposit them either in savings accounts or in term deposits under different categories and banks lend this to borrowers. Depositors get interest on these principal sums and can withdraw the balance in their needs. The main character of these funds differs greatly from the way business raises money. Business raises money either as owner’s equity or debts of different kinds. The ‘owner community’ could vary from being small for closely held firms to large for companies listed on stock exchanges. This capital is a risk capital that receives dividends/bonus shares if the company earns and distributes profits but not if it makes losses. The other benefit of equity is the appreciation in their value, which depends on the perception of shareholders at the stock exchanges. So, there is a clear risk-reward relationship in the case of equity capital.
In case of debt in the form of loans from banks/FIs or debentures/bonds listed in stock exchanges, the return is from the interest earned. Also, the principal is safeguarded by securities retained by the lenders. Thus, in this case, too, there is a relation between risk and reward. In case of default, the lender has a higher priority in recourse over the equity owners.
Now coming to account holders’ deposits in the banking system, the picture is completely one-sided. First, the rate of return, i.e. interest on deposits is fixed at the time of investing and is linked with the interest or repo rates announced by RBI quarterly. Off late it has been declining. Secondly, it is taxable in the hands of the depositor. So, post-tax returns are further lower. About the risk coverage on the deposits. Under the deposit guarantee scheme by DICGC, a maximum of ₹1,00,000 is insured for each user for both principal and interest amount. If the customer has accounts in different banks, all of those accounts are insured to a maximum of ₹1,00,000. However, if there are more accounts in the same bank, all of those are treated as a single account. Thus, depositors are at the receiving end when a bank faces problems (such as the one at PMC Bank). In the Indian banking system, the depositor base is ₹120 lakh crore but insurance covers only ₹33.7 lakh crore! So, for banks, the depositors’ funds are risk-free money on which no provisions need be made. The deposit funds are neither in the nature of equity nor loan. So, in case of default by a bank, they would not be qualified by agencies like NCLT! What a sham? Who are the main depositors; common man and retired senior citizens! In the developed countries the problem is addressed in an interesting manner! In many countries bank deposits no longer get any interest, in fact, some banks charge for keeping their money, so hardly anybody keeps money in deposits. Is it time to think about this major problem? Government and Economists have to think …..