Generally, we feel comfortable with people that we label as ‘my community’. That is why Konkanis will bank with Saraswat bank or NKGSB bank, Mangaloreans will bank with Bharat bank, Maharashtrians will bank with Mumbai cooperative Bank, people from Punjab will bank with PMC bank, etc, etc. Note that all of the above are co-operative banks and will pay a bit more interest.
Why do we have this tendency? When we visit the branch, the people speak our language, the service is better (as compared to the PSU banks) and we feel comfortable.
We go to the bank to deposit our hard-earned savings there. The bank, in turn, pays us some interest and invests the money in other businesses and makes a profit (at least that is the expectation).
So, when we put money in any bank, doesn’t it make sense to go through the annual report and check the financial condition of the bank rather than the ‘community connection’? Most of us do not understand a balance sheet. Why not spend a couple of thousand and go to a CA and ask him to explain things to us? After all, we are entrusting the bank with our life’s earnings. But we prefer to give our money to ‘people like us’!
Now, assume I’m a cheat. One of the main requirements for me to cheat someone is to make him / her trust me. How do I do that? The easiest and the fastest way is to spend time at a place of worship – a church, a temple, a gurudwara, etc. Spend enough time there on a regular basis, meet and talk to people and over a short period of time, people will be comfortable with me and it makes it that much easier to get my hands into people’s pockets! The comfort level has been established. So, think twice about investing money with someone who you know nothing about except that he is from the same church or temple.
So, what to do? I don’t think there is a way to avoid losing money if the bank guys themselves are cheats. But one can do the following to minimize the risk.
• Avoid co-operative banks as far as possible. They pay a bit more as interest, but the regulations for these banks are easily flouted by the management. Also, most of the banks have politicians at the helm.
• If you have to go with a co-operative bank, ask for the latest balance sheet and ask someone to explain the risks involved. Look at the ‘NPAs’. An NPA is a ‘Non-performing asset’ – it means those loans that were given and have gone bad.
• The NPA figures can also be misleading as the banking regulator lets the banks ‘make provisions’ for some of the loans. This means, if the banks feel a particular loan of say, 500 cr, may not be repaid, it can keep aside 500 cr to cover that loan. This brings down the NPA figure and makes the balance sheet seem better.
• Better to distribute your savings across 3 – 4 nationalised (or private) banks. Your deposits are insured up to Rs.1 lac per bank. In any case, the chances of all 4 banks where you have money in, going bust simultaneously, is slim.
Just as most of the depositors of PMC bank are realizing now, the fact that the people talk like us, share a place of worship and have a lot of things common to us, does not mean that they share your values and ethics!
Lastly, the Sikh community has taken the unprecedented step of banning those involved in the scam from all community functions. Actions like these, probably, would be the only thing that will make the scamsters think twice. Otherwise, whenever a scamster is arrested by the police, there is a large number of people supporting them!
Happy Investing! Be safe! Remember, nowadays the return OF capital is more important than return ON capital!