Indian savers may bury cash

zoom

Housewife Sumathi Govindaraj has had an account at ICICI Bank Ltd, India's second-biggest lender, for four years. Last week she transferred her life savings of more than $4100 to state-run Indian Bank after hearing rumors ICICI could be in trouble.

The mother-of-two from the southern city of Coimbatore thought her money would be safer at a government institution. She didn't know that deposit holders at all Indian banks get the same official guarantee: $2100 per account.

"I moved all my money thinking it is all safe; how is it that only $2100 is insured?" asked Govindaraj, 36. "The only option seems to be to put the money in a pot and bury it in the backyard."

Savers, spooked by concerns the global credit crunch may squeeze Indian lenders, are demanding the government increase deposit insurance that was last raised in 1993. In the past five years, household savings in India nearly doubled to $204bn as the country's economy boomed.

Indian officials haven't followed their counterparts in Europe, the US and Australia in raising guarantees, arguing that the nation's banks are sound.

"Investors are panicking," said PGR Prasad, an adviser at Bangalore-based Wealth Solutions Pvt, which provides financial services to companies. "It doesn't make any difference whether it is in a public sector bank, or a private sector bank, deposits aren't fully guaranteed."

On Sept 30, the Reserve Bank of India released a statement saying ICICI was "well capitalised" and had sufficient funds to meet the requirements of depositors after media reports about the Mumbai-based bank's financial position led some customers to make withdrawals. ICICI CEO KV Kamath said the speculation was "baseless and malicious."

Words may not be enough to calm consumers, said Yashwant Sinha, a lawmaker from the opposition Bharatiya Janata Party, who served as finance minister in the previous government.

"It's no comfort for people who have larger sums of money," he said. "There is a case for increasing deposit insurance."

In 1962, India became the second country after the US to insure deposits following a series of bank failures, according to the central bank's website.

The Deposit Insurance and Credit Guarantee Corp, owned by the Reserve Bank of India, increased the insurance limit to $2100 in 1993. Since then, insured deposits have risen almost 11-fold to $377.6bn, according to the agency's annual report. The number of accounts increased to 1.03 billion from 354.3 million.

Sanjay Shah, a 34-year-old executive at a plastics maker in Baroda, last week shifted his personal account to State Bank of India from ICICI. He said the cap should be raised to $31,500 per account.

"If that doesn't happen I will open multiple accounts in multiple banks," he said.

Such concerns are unfounded, said Sujan Hajra, chief economist at Mumbai-based Anand Rathi Securities Ltd.

"We haven't had an incident for decades where a depositor was not saved during bank failures," he said.

Since 1969 the government hasn't allowed any banks to fail, merging 31 troubled lenders with stronger, mostly state-run, institutions to protect deposits, according to the central bank.

Most recently, Industrial Development Bank of India Ltd acquired unprofitable United Western Bank in 2006.

There's no need to increase deposit protection, said MS Sundara Rajan, chairman of Indian Bank, the nation's 10th-largest by market value, because domestic lenders aren't short of cash like their overseas counterparts.

"You need high insurance only when you are driving rashly and there's a possibility of an accident," Rajan said. "Our banking system is rock solid."

Even so, India has taken action to boost liquidity. On Oct 10, the central bank injected about $12.59bn into the financial system by cutting the cash reserve ratio, the amount lenders must store with the bank, to 7.5 percent from 9 percent.

A day later, central bank governor Duvvuri Subbarao told a meeting of the International Monetary Fund in Washington that the "efficacy and coverage" of deposit insurance was a relevant issue. That's the only comment the bank has made on the subject.

Governments from the US and UK to Australia and New Zealand raised protection levels to prevent bank runs as the financial system teetered near collapse after global losses of more than $630bn linked to US subprime mortgages.

Indonesia last week increased its deposit guarantee 20-fold to 2 billion rupiah ($204,000) per individual.

Increased protection for individual investors is only fair, said R Kalyanaraman, a director at IMNC Logistics Pvt in Navi Mumbai. He doesn't invest in stocks, mutual funds or real estate because he thinks it's too risky.

"When I don't gamble for high returns, the government should ensure that all my money with banks is safe," said Kalyanaraman, 42, who has more than $10,500 deposited.

Housewife Govindaraj agrees.

"It is going to be tougher on old people than me," said Govindaraj. "Retired people want safety and they don't want to rely on their kids' income.

This article is courtesy of Bloomberg.

Print | Email | Discuss this article

| Share |

READERS' COMMENTS

Click here to post a comment

Add your Comment All posts are sent to the administrator for review and are published only after approval. ArabianBusiness.com reserves the right to remove any comment at any time for any reason. Please keep your responses appropriate and on topic. Arabian Business would like to point out that only comments relevant to the story will be published. Any containing personal insults or inappropriate language will not be approved.
Name *
Remember me on this computer
Email *	(Your email address will not be published)
City
Country
Subject *
Comment *
Notify me of further comments
Enter the words above *
Please click post only once - your comment will not be published immediately.

MORE FROM ARABIANBUSINESS.COM