#4 Easy steps to keep your money safe and avoid banks like Yes Bank
When people deposit money in a bank, they place immense trust in it. After all you never offer your money to an individual even if he/she is willing to give you a higher interest on your fixed deposits.
We always think about what if the person runs away with our cash; But we do not think the same way for our money deposited with a bank.
No one even gives a thought if a bank could go out of business. We think they will keep our money secure but is it always the case.
The banking system collapse during the great financial crisis (2007-08) in US and the world and the recent fiasco of PMC bank and now Yes bank in India indicates that banks can certainly fail.
Recently we heard about the Punjab and Maharashtra co-operative bank where people were unable to withdraw their hard earned savings.
Then just as India was preparing for Coronavirus another major blow came in the form of Yes Bank when government restricted the monthly withdrawal limit to Rs 50,000.
It is quiet scary to imagine the plight of small depositors in PMC bank or Yes Bank whose savings are stuck and their only assurance relies on government to secure their money.
Yes, the government and the RBI will bail out the banks and slowly increase the withdrawal limit for bank account holders. So there is no need to panic.
When I see such cases happen in front of me, I always think if we could have avoided being a victim in the first place.
A key question that needs to be addressed here. Is there anything that we can do as an average person without much financial knowledge to keep our money safe and avoid banks like Yes Bank?
1. Open An Account With A Bank Whose Shares Are Listed On The Stock Exchange
I always prefer to open an account with a bank or financial institution whose shares are listed on the stock exchange. The reason for doing this is simple.
All companies or banks whose shares are listed on the stock exchange have to compulsorily share disclosures and financial statements with the stock exchange and investors.
In case of unlisted companies/banks (shares not listed on stock exchange) they are not required to submit details of financial performance (profit/loss statement etc) every three months unlike the listed companies.
There are also investors involved who trade shares of these banks and banks hold conference calls to discuss their quarterly financial performance where investors can participate and ask questions to the management.
This does not mean a public listed commercial bank cannot go bust but they are under greater scrutiny. In fact Yes Bank is a classical example of a bank whose shares were listed on the stock exchange.
But then the warning signs in Yes Bank were flashing for quite a long time which gives me enough time to shift the funds to some other bank.
The point is that when a bank is listed on the stock exchange, you get access to a lot of information.
On the other hand for a co-operative bank like Punjab & Maharashtra Co-Operative Bank you do not have much information available in the public domain.
2. Keep Yourself Updated With The Latest News Related To Your Bank
In case of Yes Bank there were a lot of warning signs which provided enough time for a customer of the bank to shift his/her funds. You can read about some of the news articles below:
In Nov 2019, RBI reported that Yes Bank under reported bad loans by 3277 crores. Basically the number of bad loans reported by Yes Bank mismatched with RBI’s calculation.
A simple google search like “Yes Bank Latest News” once a month is enough to keep track of what is happening in your bank.
Tracking the latest news related to your bank is a very important tool to keep your money safe and avoid banks like Yes Bank.
Your funds are your responsibility and it is only wise to keep a tab on a financial institution on whom you have placed your trust.
If you read any news that makes you uncomfortable about your bank there is no harm in shifting funds to another bank.
Apart from the news related to bank, it is also advisable to keep track of the stock price related to then bank.
Is The Share Price Of The Bank Falling Rapidly?
In case there is a sharp fall in its stock price then it is wise to know the reason behind it.
Most of the time if the fall in stock price is severe it is not without a reason. Big stakeholders may be exiting the bank before any adverse news related to the bank may get out.
For example, please have a look at the stock price of Yes bank below.
The stock started a steep decline from a price of 400 Rs a share since August 2018 and has been declining ever since. In essence a bank account holder had enough time to ponder upon the reasons for such sharp fall before RBI place a restriction on withdrawal of cash from ATMs.
If you see such sharp declines in the stock price of the bank in which you have your term deposits or savings then it is better to be more cautious about it.
3. Don't Keep All The Money In A Single Bank
One should spread out the fixed deposits and cash in bank to different banks. This ensures you do not end up tying all your money in just one account.
This ensures that even if your funds get stuck in a bank like Yes Bank, you can tap in to your savings in other bank accounts.
This a very simple approach but a powerful one.
4. Keep Track Of Atleast Two Imoprtant Financial Ratios For Your Bank
Familiarize yourself with some financial ratios that help identify how well the bank is doing financially.
It is not all that difficult to understand these ratios. Imagine if you could exit a bank that is about to go down in time; You will thank yourself for the extra effort.
Please keep a tab on these financial ratios namely Gross Non Performing Assest (Gross NPA) AND Net Non Performing Assets (Net NPA) reported by publicly listed banks every quarter.
Banks give loans to borrowers and these loans are assets for the bank as they earn an interest on the amount lent.
Imagine a bank ABC Bank that lends 20 crores to a company DEF at 12% interest. This 20 crs is an asset for ABC bank as long as DEF keeps repaying the principle and interest as per schedule.
If DEF were to default on its interest payments and the interest remains outstanding for 90 days then loan given to DEF becomes a Non-Performing Asset.
This means that the borrower DEF has stopped making interest payments to the bank and the asset (the loan to the borrower) is not performing.
The total of all such NPAs is reported by the bank are called Gross NPA. Now the banks need to keep an amount aside for these NPAs as per RBI guidelines.
Gross NPA & Net NPA Ratio
The two most important financial ratios tracked by investors in case of financial institutions in the business of lending are Gross NPA ratio and Net NPA ratio.
The formula for calculating these ratios are given below:
Gross NPA Ratio = Total Gross NPA / Total Loans or advances given by the bank
Net NPA = Gross NPA – Provisions
Net NPA = Total Net NPA / Total Loans or advances given by the bank
Please note that as a customer of the bank we just need to keep a tab on these ratios and not calculate these ratios.
The higher the GNPA or NNPA ratio, higher the percentage of loans gone bad as a percentage of total loans given by the bank.
If GNPA and NNPA ratio is increasing then it is not a good sign for the bank as the percentage of bad loans to total loans is increasing.
Below is a snapshot of Yes Bank quarterly profit/loss statement. We can clearly see a sudden jump in Gross NPA and Net NPA from Mar 2019 onwards which is a cause of concern.
1. Prefer to open bank accounts with banks whose shares are listed on the stock exchange. This makes them share more financial updates on a quarterly basis and under greater scrutiny as compared to co-operative banks.
2. Keep yourself updated with relevant news related to your bank. This is important.
3. Spread out your fixed deposits and cash in different banks rather than keeping a big chunk in just one bank
4. Familiarize yourself with at least two financial ratios, namely Gross NPA and Net NPA ratio. If you see this ratio rising to around levels of 7-8% then it is a sign of concern.
So keep these points in mind to keep your money safe and avoid banks like Yes Bank.
I hope this article will prevent my readers from a future banking collapse like Yes Bank. Only you are responsible for your wealth. We cannot expect others to be fair. So take care of your wealth.
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Disclaimer: Any views or opinions represented in this blog are personal and belong solely to the blog owner. The views represented above are based on data available to investors. Any views or opinions are not intended to malign any company or individual
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