Recently the Punjab and Maharashtra Cooperative Bank (PMC) has been in the news. PMC Bank is the largest urban co-operative bank to be placed under RBI watch since the 2001 Madhavpura Mercantile Co-operative Bank crisis that was linked to Ketan Parekh’s stock market scam. While Madhavpura had a large exposure to a single stock broker, PMC Bank had given two-thirds of its loans to a single real estate developer—Housing Development Infrastructure Limited (HDIL)—whose creditworthiness was already under a cloud.
The PMC Bank has deposits of largely the Sikh community traders and salaried people, ie retail depositors. But its borrowers were not retail borrowers. 2/3rd of the borrowings were by one single entity called HDIL, a company which has same promoters as Dewan Housing Finance Ltd another shady NBFC which was involved in bad lending.
The scam is known to everyone. How bank officials in cahoots with one preferred customer screwed the depositors. It happens again and again in India. Why? The answers are too obvious and known to everyone. Our law enforcement is lax. Barring a few, businesses in India are fundamentally built on the foundations of corruption, subversion of policies, political patronage and crony capitalism. Blah, blah, blah……..The more we change, the more we remain the same.
What are the lessons for a common investor?
Till the time RBI amends its laws about liability of a bank, please break all your Fixed Deposits(FD) which are more than Rs 100,001/- in denomination into FDs of Rs 99,900 each. So that the bank/government/insurer pays that in case of a crisis.
Look at alternates for your deposits….if money is not required immediately, please open a PPF account now and keep depositing Rs1000/- each to keep it alive. And close to 12 years mark of the account opening deposit the max limit. This way, you can withdraw from/close the account after 15 years and meet your requirements.
Invest in good mutual funds. Few mutual fund schemes, but ones for the long haul. And after a few years one can withdraw a fixed amount from your MFs every month to meet your requirements. The simplest method would be to buy 100000 units of a MF scheme. Let it run till retirement. If all goes well your money should compound at 12-14%. The day you retire set up a monthly withdrawal plan. And it should last for a while, better than a FD and away from risks of a PMC Bank type of a fiasco.
Look for the best private banks/public sector banks where processes are rigid and you can’t get a loan easily. They are the ones who will take care of your deposits. IDFC Capital First is a new bank with good processes, but the accepted leader is HDFC Bank, followed by Kotak Bank.
The law must mete out exemplary punishments to those caught. Otherwise we will have every few years Harshad Mehtas, Ketan Parekhs, Ramesh Gellis and Nirav Modis… with no lessons learnt.