The recent crisis at a cooperative bank reminds us yet again that there’s no such thing as risk-free banking. The money you consider safely deposited in your local bank is subject to various risks. This isn’t the first time a small bank has had problems repaying its depositors, and it certainly won't be the last. There’s no such thing as risk-free savings and investments. In the case of the cooperative bank in question, the RBI placed restrictions on customers, first allowing them to withdraw just Rs 10,000, and then raised it in stages to Rs 50,000. This helped a vast majority of their customers to slowly start withdrawing their deposits, but it still left a few depositors with their large savings stuck in their time of acute need. What can customers do to avoid getting into such situations?

Your safety net

First, let’s understand the basic safety nets in place that can save you from total loss in case your bank goes bust. The Deposit Insurance And Credit Guarantee Corporation (DICGC) insures all bank deposits up to Rs 1 lakh.

This means that all your savings, fixed deposits and recurring deposits — both principal and interest — at the same bank across any number of branches are insured up to Rs 1 lakh. Should the bank be unable to make good on its debt to you, DICGC will compensate you to this limit. Additionally, your deposits in other banks are also insured up to Rs 1 lakh. Therefore, up to this limit, you have little to worry about, and you will be reimbursed for any losses suffered.

However, what about high-value depositors such as pensioners who survive on monthly interest income? A sum of Rs 1 lakh isn’t enough to sustain them should their bank go belly up.

Be alert

If you have large deposits at your bank, you must pay attention to the goings-on there, especially if you’re banking with a cooperative or a small-sized bank which may lack the stability of the larger state-owned banks or the established private ones.

In the case of the cooperative bank in question, it violated various norms in allowing the opening of 21,000 fake accounts to distribute loans to a real estate company which accounted for a staggering 70 per cent of the bank’s loan book. The real estate firm’s insolvency, thus, pushed the bank to the edge and its depositors wanted to pull their money out, which would have crushed the bank. Hence, the RBI stepped in to prevent the bank from collapsing.

It is, therefore, advisable to be aware of what your bank is up to. How is its share price performing? How big are its NPAs? What kind of news is it making? How profitable is it, and how has it performed quarter-on-quarter and year-on-year? Who are the bank’s biggest borrowers? How good is the corporate governance? Have there been instances of fraud? Does the bank have stable leadership? Most importantly, what are you learning about its business by interacting with its employees at the branch? These are just a few ways to have the information you need to make your decisions. With bigger banks, such information may be readily available, but you’ll have to try harder with smaller banks where the flow of information may be more tightly controlled.

Diversify, always

Investments should be diversified, and so should your savings and deposits. Never put all your eggs in one basket is how the aphorism goes. Therefore, as someone with large deposits running into tens of lakhs or crores, you should look to spread your money across various banks and investment schemes.

The probability of encountering problems with your deposits at large banks is extremely low. However, a little prudence doesn’t hurt, and proactively managing your money and diversifying your options is always better than being an unmindful depositor with a single bank. This becomes even more important when you’re banking with small-sized institutions where your risks may be higher.

For your savings and deposit needs, you need not restrict yourself to banks. You could also invest in liquid mutual funds (or similar, short-term mutual fund schemes) which provide liquidity as well as moderate returns comparable to fixed deposits but with the added benefit of indexation benefits on long-term capital gains.

As such, for long-term debt investments, strongly consider exploiting the various small savings schemes you’e eligible for. For example, the Senior Citizens Savings Scheme, which you can get from your local post office or an authorised bank, still provides an attractive 8.6 per cent return on its five-year deposit plus a sovereign guarantee of returns. Spreading out your money would provide you liquidity at various life stages, lower risks, and the possibility of higher returns from some avenues.

High interest, higher risks

There are various reasons why people bank with cooperatives and small banks within their communities. The branch employees may be friendlier to them and the interest rates on deposits may be higher.

A little more interest is especially useful to senior citizens and pensioners who depend on fixed income instruments of various kinds for their income needs.

However, higher risks may be attached to a higher interest rate. While banking with someone offering interest rates higher than larger banks, examine your risks. If you’re buying deposits from corporates and NBFCs, pay attention to the credit rating of the company.

Avoid companies that don’t have an A rating because of the higher risks of delays in repayment or default. As such, don’t put more money into a higher-risk option than you can afford losing. This also requires an examination of one’s risk appetite at every life stage.

Understanding the various risks associated with banking and investing is essential to financial stability. It’s your money after all, and you need to be careful about whom you entrust it with.

The writer is CEO, `BankBazaar.com`