This day (19 July) that year (1969)

Here is a wonderful post by Natarajan Radhakrishnan, a senior citizen @ 3003.
(Please checkout he last section where he highlights the various safe options for investing !!)

19th July 2020 is the 51st Anniversary of Bank Nationalization.

Sri Krishnan, in one of his blogs, mentioned about the falling interest rates on deposits and how in the good old days (Achhe din) things were better.  He also mentioned how this fall has affected retirees and senior citizens who depend mainly on this interest income. 

This set me thinking.  

Back in the 1960's, there were in India about 94 commercial banks, mostly in different regions and catering to the needs of the local clientele.  There was hardly any control by the Reserve Bank of India.  The volume of business and profit margins were small, and big scams were unknown.  

You will be surprised to know the names of some of these banks : Hanuman Bank (Thanjavur), CalicuT Bank, Quilon Bank, Sri Ramajeyam Bank, Bengal Bank, Sri Venkateswara Grameen Bank, etc.  Many of these banks  downed their shutters and the managers went “faraar”!  

I had a savings account in one  such bank,  called The Paalai Central Bank (a Kerala-based bank).  One fine day, in August 1960, it went “diwala”.  Several months later I received a “crossed/account payee/not negotiable”  cheque for ₹ 8/- as and full final settlement of the balance I had in savings account on the day the said Paalai  Central Bank went into liquidation. That was 40% of ₹ 20/- I had in the bank!

The decade 1960 to 1970 was a tumultuous one.  Several small banks were becoming insolvent.  Some smaller banks were getting amalgamated/taken over by bigger banks.

In the General Elections held in 1967, Indira Gandhi returned to power with a very reduced majority.  There were problems created by the senior leaders like K. Kamaraj, Morarji Desai, Atulya Ghosh, Nijalingappa and others, who were quite disenchanted with her style of governance.  Therefore she had started leaning towards the Communists, who also wanted their pound of flesh for supporting the Government.  As their demands were getting more and more strident, Indira Gandhi was under tremendous pressure to do something to please their constituency, namely, the poor and under-privileged  - “Do something for the poor who are our bread and butter” during elections (Garibi Hatao).

 On 16 July 1969 Morarji Desai resigned from the Cabinet.  He was Deputy Prime Minister and Finance Minister.  Indira Gandhi was just waiting for this to happen. In the next two days, officers of PMO, Finance and Law Ministries and the RBI were burning midnight oil to produce a document of far-reaching importance.  

On 19 July, 1969, (three days after Morarji Desai resigned) President V.V. Giri promulgated an Ordinance called Banking Companies (Acquisition of Undertaking) Ordinance, 1969, whereby 14 big banks were nationalised and came under Government Control.  More Banks were added to this list in later years.

(The other very important measure undertaken by Indira Gandhi was the Abolition of Privy Purses, which the Maharajahs, Nawabs, etc. of the erstwhile Princely States we’re getting, on their agreeing to join the Union of India.  General Insurance was nationalized in 1972 and 107 private general insurance Companies were grouped and amalgamated into four nationalized Companies.)

With the nationalization of banks, people thought that their money would be safe as these banks have the backing of the Government of India.  Nobody ever thought that there existed a possibility when a Bank may refuse to honour its commitment to repay the money.  

Recent examples are : PMC Bank, YES Bank and  Guru Raghavendra Sahakari Bank (Basavangudi).  As far back as 1961, a Deposit Insurance and Credit Guarantee Corporation of India (under the aegis of the Reserve Bank of India) was created which provided that when a Bank goes bust, the maximum amount that a depositor can  get back, was ₹ 1 lakh!  

In fact a certain private bank started putting a rubber stamp warning on the passbook about this limit.(In the budget for 2020-21, this limit has been raised to ₹ 5 lakhs).

This raises the question: how safe are Bank deposits?  

Till recently, we thought that what we saved and parked in Banks are quite safe, until the politics came in the picture. Indiscriminate lending not backed by any collateral security and a few borrowers not repaying the dues (e.g. Vijay Mallaya, Nirav Modi, Mehul Choksi, et al) forced banks to show the unrealized and unreasonable amounts as “Non-performing Assets” and in a number of cases were written-off, in what was called as a “bail-out” exercise.  Such liabilities were running into several thousand crores.

In December 2017, the NDA-1 Government brought in a Bill called Financial Regulation and Deposit Insurance Bill, 2017.  The Bill, among other things, provided that whenever a Bank faces loss (due to defaults by major borrowers) a “bail-in” clause was to be introduced whereby the Bank could use the deposits of its clients to meet the loss/default by some borrowers, making-up its balance sheet.  There was widespread apprehension and fear in the minds of the depositors, especially senior citizens, who were dependent solely on the periodic interest pay-outs on their deposits. 

While the Bill was under examination of a Joint Select Committee of Parliament, bowing to the criticisms of the public, Finance Minister Piyush Goel withdrew the Bill, in August 2008, providing a major relief.  But one cannot assume that the proposal is dead and gone forever.  Once the present Government is free from the problems, it may consider re-introducing the controversial Bill.

 

So, this brings us as to how safe are our FDs, etc. in the Banks.  

Technically, our deposits are guaranteed for return only up to ₹ 5 lacks.   The excess amounts are called “unsecured”.  In the last fifty years, no nationalized bank had gone bust.  Therefore it is safe to assume that we would get back our monies.  This, however, cannot be said about the private banks.  

About 10 years ago, there was a “run” on the ICICI Bank in some branches in Gujarat.  However the RBI came to the rescue and provided the necessary liquidity.  Other examples : Global Trust Bank was taken over by HDFC Bank, YES Bank was rescued by by State Bank of India. 

But the PMC Bank and a few other co-operative banks were not lucky, and the depositors are left in the lurch.

As a senior citizen, I would settle for safer avenues even if the rate of interest is a little less, but (presently) more than the bank rates.

They are :

1. Senior Citizens Savings Scheme (a GOI) Scheme - ROI - 7.4% 

2. Floating Rate Savings Bond (RBI) - 7.15% 

3. All Savings schemes of the Post Office (GOI) like PO Time Deposits, National Savings Certificates, Kisan Vikas Patra, Monthly Income Schemes, etc. ROI 6.8% 

4. Public Provident Fund for youngsters (7.4%) (interest changes every quarter) Also it is called EEE (Exempt at the time of investment, Interest earned is Exempt, and maturity amount is also Exempt from income tax).

 5. Pradhan Mantri Vaya Vandana Yojana, managed by the Life Insurance Corporation giving interest rate of 7.4% at present.  This rate will be reset every year in alignment with the rate offered under the Senior Citizens Savings Scheme.

  6. For the youngsters, the National Pension Scheme is an ideal investment, where you can accumulate a good sum as the corpus, get back 60% of the corpus as a taxfree lump sum, and also get a decent pension for life.

Another good investment for those who do not wish to have periodic interest pay-out is investment in Sovereign Gold Bonds of the Government of India.  Details are available in the net.

Thanks for reading.  Regards.

and Thank You Sir, for this comprehensive and very insightful post.

Krish..