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Savers may bury cash in ‘panic’ over banks

business Updated: Oct 14, 2008 21:57 IST
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Housewife Sumathi Govindaraj has had an account at ICICI Bank Ltd., India's second-biggest lender, for four years. Last week she transferred her life savings of more than Rs2,00,000 ($4,100) to state-run Indian Bank after- hearing rumors ICICI could be in trouble.

The mother-of-two from the southern city of Coimbatore thought her money would be safer at a government institution. She didn't know that deposit holders at all Indian banks get the same official guarantee: Rs 1,00,000 per account.

“I moved all my money thinking it is all safe; how is it that only Rs1,00,000 is insured?” asked Govindaraj, 36. “The only option seems to be to put the money in a pot and bury it in the backyard.”

Savers, spooked by concerns the global credit crunch may squeeze Indian lenders, are demanding the government increase deposit insurance that was last raised in 1993. In the past five years, household savings in India nearly doubled to 9.85 trillion rupees as the country’s economy boomed. Indian officials haven't followed their counterparts in Europe, the US and Australia in raising guarantees, arguing that the nation's banks are sound.

“Investors are panicking,” said PGR Prasad, an adviser at Bangalore-based Wealth Solutions Pvt., which provides financial services to companies. “It doesn't make any difference whether it is in a public sector bank, or a private sector bank, deposits aren't fully guaranteed.”

On September 30, the Reserve Bank of India released a statement saying ICICI was “well capitalised” and had sufficient funds to meet the requirements of depositors after media reports about the Mumbai-based bank’s financial position led some customers to make withdrawals. ICICI Chief Executive Officer KV Kamath said the speculation was “baseless and malicious.”

Words may not be enough to calm consumers, said Yashwant Sinha, a lawmaker from the opposition Bharatiya Janata Party, who served as finance minister in the previous government.

“It's no comfort for people who have larger sums of money,” he said. “There is a case for increasing” deposit insurance.

In 1962, India became the second country after the US to insure deposits following a series of bank failures, according to the central bank’s Web site.

The Deposit Insurance and Credit Guarantee Corp, owned by the Reserve Bank of India, increased the insurance limit to Rs 1,00,000 in 1993. Since then, insured deposits have risen almost 11-fold, according to the agency’s annual report. The number of accounts increased to 1.03 billion from 354.3 million. The limit could be raised if savers paid a premium to insure deposits beyond Rs1,00,000, said Prakash G. Apte, one of nine board members at the Deposit Insurance and Credit Guarantee Corp.

“There's no way government could provide free insurance to all this,” said Apte, professor of economics and social science at the Indian Institute of Management, Bangalore. “Start charging an insurance premium and any amount can be insured.”

Sanjay Shah, a 34-year-old executive at a plastics maker in Baroda, last week shifted his personal account to State Bank of India from ICICI. He said the cap should be raised. “If that doesn't happen I will open multiple accounts in multiple banks,” he said.

Such concerns are unfounded, said Sujan Hajra, chief economist, Anand Rathi Securities Ltd.

“We haven't had an incident for decades where a depositor was not saved during bank failures,” he said.