Lakshmi Vilas Bank is the fifth financial firm to collapse in India within the last 30 months. In these five banks, most were sending out message far in advance that they are about to fall. Is there any method for common people to survive in such failures?
Methods or tricks to survive:
Banking is a difficult business. In India it is a more difficult due to corruption and many legal problems. While there is repeated reforms in the recovery part of bad loans, the disbursement of loan is anything but transparent. The Banks have SOP on disbursement of loans but it collapses after every two decades. Last time there was a similar problem in 1996-99.
The high interest rates on credit is only a reflection of this problem of bad loans. The difference of 3-7% between the prime deposit rate and lending rate is unusually high to cover the cost of money wasted on bad loans. But that is another problem. So how does a common person survive such falling banks?
Few Survival tricks:
There are many simple rules which have to be followed. But this guide is for those who have funds below ten million (one Crore) in cash to handle. For sum more than that, these rules may help but may not be sufficient. First is Post Office Bank.
Post Office Bank
Post Office is the most secured bank of India as it is directly owned and managed by Govt. of India. It can never fail for if it fails, it means the Government of India has failed and that would be collapse of authority of the country itself. So be assured it is not going to happen. There are two more reasons that it will not collapse. First is that the Post Office does not lend loans like private banks and second that it does not accept large deposit. The upper limit for deposit is about 8 lacs per person. Therefore the first rule is to park your emergency funds in Post Office. This would be helpful if your bank goes in moratorium, blocking your funds.
Rule of Four:
Always divide your funds in four lots and keep each lot in different Bank. Two or three bank accounts in same bank do not help. Have Four different accounts in four different banks.
Each Bank account in India is insured against any insolvency of banks upto 5 lacs (half million). In other words, come what may a depositor will get upto 5 lacs from Credit and Deposit Guarantee Corporation of India a sum upto Rupees 5,00,000/- if the bank is unable to pay back.
Attitude of Bank:
Most of the banks before it’s failure start to ignore the common customers. There service go down. Reason is that their focus of attention is big account holders. They lend to big and attract big depositors leaving small depositors to fend for themselves. This rule is not infallible but it usually happens. Even if you do not notice any change, notice if there is unusually less crowd in the bank on every visit to it’s branch. It will also be noticed from the service requests made to bank. Responses will be slow or inadequate.
Signs of corruption
This is more tricky but let me share it too.Middle man is not always a bad person. Often they are good but if your Bank Manager is dispensing loans through middle man, it is a big big red flag. Ideally there are many departments who should notice before the people notice but actually it happens other way round. If you ever hear a rumour that your bank is very convenient place to take ‘commercial loan’, Beware. In fact many banks like Axis Bank does not give commercial loan at all. (Hope you understand the difference between consumer, housing and commercial loans.)
It is not always corruption which results in bad loans. Giving loan to a going company is a different cup of tea from that of a new company which has to start up a new business. Investment in new businesses is called Investment Banking and most banks are not equipped to evaluate new projects. It is a suicide that Bank Manages and other officers who have not been imparted any training in Investment Banking are giving loans to new start ups which later turn into bad loans. But that is matter of bigger debate.