India reported non-performing assets (NPAs) of Rs 9,33,625 crore as on March 31, 2019, and a large part of it was attributed to public sector banks that are owned by the government of India. Gross NPAs ( percentage of total loans) have increased from 2.3% in 2008 to 9.3% in 2017. NPAs are basically bad loans that have been in default for more than 90 days.
Speaking to BOOM, Vivek Kaul, economic commentator and author of Bad Money said, "It's not only crony capitalism, in 2004, and 2011 because of the euphoria in the Indian economy, bankers lent more than they should have, and corporates ended up borrowing more than they should have."
Kaul said that while Vijay Mallya and Nirav Modi might be the poster boys for bad loans, but if you dig a bit deeper you realise that there are bigger defaulters out there that no one has heard about.
He adds, "No one knows Brijmohan Singhal, the Chairman of Bhushan Steel, the company that defaulted around 5,600 crores. Vijay Malaya and Nirav Modi are comparatively small fish, who were well known in the media because of their flamboyant lifestyle."
So what can retail depositors do to ensure that they do not bear the brunt of large borrowers defaulting on loans and impacting the health of the banking industry? Vivek pointed out 5 things depositors should keep in mind while thinking about where to park their money.
1) Don't put all your money in one bank. A lot of depositors who had parked their life savings in Punjab and Maharashtra Cooperative Bank lost out after the bank went bust and the RBI put regulatory curbs. While the earlier withdrawal limit was at Rs 50,000, the RBI increased the limit to Rs 1 lakh due to difficulties faced by depositors post the COVID-19 related lockdown.
2) There should be greater education and understanding of which banks a depositor should trust with their money. It is important to remember that all banks are not safe havens for your money.
3) You have nothing to worry if you are dealing with a scheduled commercial bank, and not a co-operative bank. Though there are well managed co-operative banks in the country, it is difficult for a depositor to check the quality of such banks. Hence, it is better not to avoid your hard earned money in co-operative banks.
4) If depositors feel co-operative banks are easier to withdraw money from, then they should use them for daily use and have a bulk of the money parked in a good scheduled commercial bank.
5) To find out which is a good scheduled commercial bank, look at the bad loans rate of a particular back, if it is more than 10%, then don't put the money there.
Kaul says these points are important because if a bank is put under a moratorium, even for a few days, you can be in trouble. "Just like how Yes Bank was put under a moratorium for just a few days, and it wasn't good for the depositors, be careful while choosing the bank you trust your money with. Money is only important when you need it," he said.
Catch the full interview on YouTube or click on the link here.