Diversification is as Important in Savings as in your Investments
Earlier this month, depositors of an almost a century-old private sector bank – Lakshmi Vilas Bank – were greeted by a rude shock. The Reserve Bank of India had capped the withdrawals from the bank at Rs 25,000 per customer per month. However, the depositors in this case are particularly lucky – in just a matter of few days, these customers have again gained full access to their savings as all the branches of this bank operate as DBS Bank from 27th November 2020.
Unfortunately, very few stories have such a happy ending. There is another story of a stressed bank where the depositors are still struggling to get their money back from the bank. The customers of Punjab and Maharashtra Co-operative Bank (PMC Bank) are still under withdrawal restrictions from the RBI, even 14 months after their ordeal started.
There is a reason why we are talking about all of this today.
Far too many people we talk to rely on a single bank for all of their financial needs. If someone had all of their life savings, say, in the PMC Bank, imagine the ordeal of not being able to access your own money for a long time. No access is as good as not having that money!
These two episodes have some lessons for all of us from a financial planning perspective. Let us take a look at a couple of such important learnings.
Know your bank
To be honest, many people think that having a good rapport with the branch manager of their bank branch and getting quick service for routine affairs means that their bank is doing great. To be fair, this is a good thing to have, but not sufficient. As consumers we must learn to go beyond the daily niceties of the professionals around.
Your bank is the custodian of a significant chunk of your wealth. You must always strive to keep yourself up to date about the health and happenings of your bank. Over the past few years, non-performing assets have been in the news. Please remember that it is not very difficult to keep a track of the non-performing assets of your bank.
For instance, the NPA ratio of Lakshmi Vilas Bank was 24.5% as of end-September 2020. In other words, the bank was finding it very difficult to recover Rs 25 of every Rs 100 they gave out as loans. These numbers speak a lot. It can also be said that wise depositors had ample time to move their money out of this bank in time.
Diversify your investments, and savings
Many of you who interact with us on a regular basis know how peculiar and particular we are about diversifying investments. The conversation there is mostly about allocating money to equity, debt, gold, real estate, etc. In some cases, we also end up advising that the amount lying in savings bank accounts should be put to better use as it is being eaten away by inflation.
It is pertinent to go beyond that. If you have a good chunk of money in a savings account which you do not intend to invest, make sure it is spread across 2-3 banks. This is more so if you have money lying in the ‘smallish’ banks which have lately mushroomed, cooperative banks which are quite popular in small towns and villages, or banks which start coming in news for all wrong reasons. This number will vary depending on the comfort and convenience of every person. But this will ensure that just in case one of those banks goes under moratorium like Lakshmi Vilas Bank or PMC Bank, you will not be left empty handed and your needs will largely be taken care of.
In our busy lives, we do not think much about contingency plans at different levels. This is a good time to remember that contingency plans too can be of different forms in different situations.