Banks are not safe and good as you think for your money

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February 11, 2011 · 2 comments

Managing money is more difficult than earning it. Majority of the Indians park their money in Banks for investment purposes. Only 3% invest in stock market which is one of best compounders of money. Though I know few friends who tried investing without knowing what they were doing in stocks and burnt their fingers, they now swear that their money will never head towards stocks. Phew!!

Everyone thinks that Banks are the best instrument for parking their wealth and trustworthy. No arguments! But certainly there’s something which you may not know about banks. Here are 3 reasons stating banks are not as good as you think.

Reason 1. Limited Guarantee for your Money:
What will happen if the bank where you have account goes bust? Well, govt will pay your money back, no matter what happens to the bank? Nope. Want to highlight that on liquidation (selling defaulter bank property to repay depositor’s money), every depositor is entitled to repayment of his/her deposits up to a monetary ceiling of Rs. 1,00,000/- (Rupees One lakh only) from the Deposit Insurance and Credit Guarantee Corporation (DICGC) under usual terms and conditions. So, if you have 5 Lacs in your bank account, only 1 lac will be returned. No assurance, no guarantee, no commitment for the remaining amount. If you think, banks can’t go bust…read on.

Reason 2. Frauds are in banks as well
Frauds are in every industry and banking is not an exception. There are many instances where banks were found to be malfunctioning, conducting frauds and their licenses got canceled by RBI. Few instances are listed below:

* The Reserve Bank of India has canceled the license of National Co-operative Bank (NCB) operating in Kurnool District citing the latter’s chronic defaults to the depositors and its failure to file statutory returns with the central bank. The order canceling the license was delivered after the close of business on April 7, 2010. Source.

* Parmatma Ek Sewak Nagrik Sahakari Bank Ltd., Nagpur, Maharashtra went bust on april 27, 2010.

* Pune-based Ajit Sahakari Bank Ltd breathed lasts on Jan. 28, 2010.

* Four cooperative banks found guilty of involvement in scams: Madhavpura Mercantile Cooperative Bank (MMCB), Krushi Cooperative Urban Bank (KCUB), Charminar Cooperative Urban Bank (CCUB) and Nagpur District Central Cooperative Bank (NDCCB) in 2001-02.

Ok, you are assured because you haven’t heard about these banks and also don’t trust such tiny unknown banks for your money. Big banks are not an exception again. Did you heard about Global Trust Bank? It’s one of the large private sector banks cornering crores of people’s money declared dead in 2001 due to involvement in stock scam. Later it got merged with OBC.

Next, you can think that PSU banks are the safest? May be right but not the best! Remember no guarantee for your entire money whether it’s in a private or a public bank. And why banks are not the best, read on…

3. Very low Returns
Suppose you give me Rs. 100 today and I will return Rs. 80 to you next year. What will you think and do? You will smile at me and say thanks. Correct? Why not? It’s what you are doing with Banks. They are giving you petty interest of 3.5% on savings and around 5-6% on FDs (for 1 year). Consider inflation at 10% and you are getting negative return on your investments. Even if inflation is 8%, you will get -2% return on your FDs for a year in general

Well, my intention here is not to prove that Banks are not safe or good but that some kind of risk is everywhere. We are working hard to earn money and money should also work hard for us! Keeping it idle at banks will do no good to you except for giving you a sense of security.

A better way is that instead of investing money in saving or FD, why don’t you purchase the share of that bank as well? It’s an irony that when we put money in saving, the bank is super safe but when we buy its share, we think it can bust the next day. I’m not advocating for private banks, you can purchase shares of PSU banks and forget them for some ‘fixed’ time like 3 years, thinking that you have a super FD

As an example, if you opened one FD in State Bank of India on May, 2007 for 3 years, you got around 7% appreciation of your money, while on the other hand, if you purchased shares of State Bank of India on May, 2007 (share price Rs. 1200), you will get around 90% appreciation of your money now as price in May, 2010 was around Rs. 2250/-.

Another example, if someone invested in a Bank of India fixed deposit account in 2001 they would have an 8 percent simple return per year. If the same person invested in Bank of India stock he or she would have a total return of 3,300 percent as the stock rose from 12 rupees to 410 rupees.

Of course, we must be extra cautious before investing in stocks as higher risk is there, so due analysis is recommended and remember, the biggest risk in life is not taking a risk. So, prepare well and at a minimum level at least starting investing in Mutual Funds if not in direct stocks. Let me know, what are your thoughts about such an approach.

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