Few weeks ago, RBI capped the cash withdrawal on Yes Bank Deposits due to an alarming cash crunch in the bank. It did make many of us think - are our deposits safe?
Well, let us take very brief thinking of whether we are doing the right classification of our fixed deposits? Are they not some kind of Unsecured Debentures or Bonds or other debt securities? I believe they are & if that so, whether we are really giving it a thought before putting up our hard-earned money in bank's pocket as we would do in case of investing in other debt securities?
I believe for many of us the answer is no & urge all the readers to effectively use five minutes of their time to contemplate the following points below:
- Nature of Investment can’t define it to be a safe Investment (the substance over form).
- Any Investment can be a good one if bought knowledgeably.
- Choosing Debt Investments (Fixed Deposits) is a negative art. Reject more to choose less on the criteria of safety.
- If there is even an itsy - bitsy doubt about the stability of the company, decline it straight away. Don’t get lured by high-Interest Rates.
- For Debt Investments, always give preference to safety over Interest Rates.
- Studying the Ethic Character, Size & management of the company is equally important.
- Most importantly, study past profitability (industry depressive times importantly) of the company & try assessing its future potentials. Also, go for a solemnly good Interest coverage ratio.
- At last despite our best efforts, mistakes can never be evaded. And no investment can be regarded as 100% safe.
I believe many of us are not bearing in mind the above before making fixed deposits & are over-relying on our banking system blindfolded. The Overall Gross NPA (Bad Loan) is 9.1% in Indian Banking System in FY 2019. Now many of us would altercate the continuous recapitalization by the Government & Bank Deposit Guarantee, but that too can’t hold out against a prolonged depression test. Also, the other optimists would argue for the well-secured assets as security but let me ask them whether you would really like to get involved in reorganization delays and liquidation stuff & invite unnecessary troubles as if you are having any less of them right now?
And let me remind you when the Financial Resolution & Deposit Insurance (FRDI) Bill gets enacted, we are anyways screwed & have to appraise sternly before making Fixed Deposits. Fixed Deposits are made with a presumption of safety, has been a long practice. Let's break the pattern & do it out of the box way.
The author is a member of the Institute of Chartered Accountants of India and can be reached at mahajangupta.ca@gmail.com
The information contained herein is the personal opinion of the author. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Also the risk-return analysis is not considered as the above write up is notably for the non-professional individual investors.
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