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ET Wealth Wisdom Ep 61 (ET Online)

5 personal finance takeaways from the Yes Bank crisis

10:05 Min | March 13, 2020, 2:04 PM IST
In this week's podcast we will tell you about the personal finance lessons we have all learnt from whatever has happened in the aftermath of the Yes Bank crisis.
Transcript
Hosts: Tania Jaleel, Shambhavi Mehrotra

Producer: Abhinav Tripathi

The Yes Bank episode was indeed an eye-opener for almost all of us

So far, stories of customers getting impacted terribly by scams at banks have been relegated to cooperative banks, case in point, the PMC story

We empathised with those who lost their life savings

But with the Yes Bank, it is something that has hit close to home

After all, it is one of the biggest banks in the country… a big private sector bank where many had savings accounts, companies had their corporate accounts, fund houses had invested thanks to its bluechip status, senior citizens held bonds and so on and so forth

The Yes Bank crisis is having a ripple effect of sorts on other private banks, forcing these lenders to clarify their position and address depositor concerns

RBL Bank, Karnataka Bank, South Indian Bank, Karur Vysya Bank, Kotak Mahindra Bank, in separate communications to their customers, have clarified rumours around their financial health

This also follows an RBI clarification about the safety of banking deposits on Sunday

So, are there any lessons that can learnt from the Yes Bank fiasco?

Hi everyone welcome to another episode of ET Wealth Wisdom podcast. I am SM and I am TJ. In this week's podcast we will tell you about the personal finance lessons we have all learnt from whatever has happened in the aftermath of the Yes Bank crisis

High returns are usually not sustainable in the long run

Why do many people invest in FDs of say cooperative banks?

The high interest rates mainly

Yes Bank too marketed itself as a bank that offered higher interest rates on not just FDs but also savings accounts

Yes Bank FDs offered an interest rate of 7.25% per annum for tenors of 1-10 years. Compared to this, a bank like SBI offered 6% a year

Yes Bank savings accounts earned an interest rate of 5-6% a year. For a savings account with SBI you get 3% a year

Someone in our office confessed that the only reason he said Yes to maintaining an account with Yes Bank was due to the high interest rates on its savings account. He, like many others I bet, are waiting to see if the moratorium on the bank will be lifted before April 3

Dilshad Billimoria, founder of Dilzer Consultants says that right from the start, she advised her clients to not just go by high interest rates. When it is too good to be true, there is always a flipside she says. She adds that if you are getting, say 1-2% more somewhere, you should know that it in the long run it is not sustainable in most cases

Suresh Sadagopan, founder of Ladder7 Financial Advisories, says that high returns equal high risk. It would be an anomaly if a high return product came with low risks.

Such products should be scrutinised carefully he says, and adds that no financial institution is altruistic in nature.

That brings us to the next lesson or takeaway

Not doing enough due diligence

It has come to light in the aftermath of the Yes Bank episode that relationship managers at the bank sold, what is called an additional tier 1 or AT1 bond to many senior citizens. There were stories of how some put in all of their retirement money into such bonds and are now stuck

This is a larger issue say financial planners

Suresh says that it is a matter of great concern that many investors without understanding the in and outs of a financial product put in large sums of money into it just because of the 'higher' returns

This has been a huge ongoing problem with many retail investors, they just do not do the required due diligence. People have to take charge of their finances he says, it is your hard-earned money after all.

He goes on to say that he has clients to have 'invested' in insurance products.

This folks, is a big personal finance no-no

Managing your bank accounts

The government and the RBI imposed a moratorium on Yes Bank restricting withdrawals up to Rs 50,000 until April 3

Remember the colleague we spoke about in point number 1, he had linked a lot of his expenses like school fees and loan EMIs to his Yes Bank account.

He is not alone. Many are there who have just one single bank account from which many ECS mandates are linked. These include ECS mandates for EMIs, bill payments, credit card payments, investments like mutual fund SIPs, PPF and the like

The same was the case with many in the PMC crisis… here too withdrawals were restricted leading to pandemonium

How do you cushion yourself against this?

Many planners suggest having multiple bank accounts.. two accounts in different banks is what Dilshad recommends.. one salary account and one savings account.. this way you can spread the risk

It is not just that

What with the deposit insurance limit hiked to Rs 5 lakh per bank in Budget 2020, having multiple accounts would mean that you can get higher insurance covers across deposits like savings and current accounts, FDs and even RDs

Use the savings account to link your investments and expenses

Our listeners should know that fund houses allow you to link more than one bank account to investments. Registering more than one account can help you tide over such an eventuality

Since we are on the topic of mutual funds, here is lesson number 4

Direct stock investing is not for everyone

Yes, agreed that Yes Bank was a bluechip stock and was part of the Sensex. And they say that large-caps are generally safer than their smaller counterparts

What is alarming here is that even stock brokers who were supposed to track stocks did not warn investors.

That is right… trouble has been brewing in the bank for months now.

I read a news story on that Yes Bank's chief economist sold off shares worth almost Rs 2 crore on December 31. That was huge alarm bell that many should have taken note of

Yes Bank stock took a big beating a day after the announcement of the moratorium… it nosedived 85% during intraday trade on March 6.. it fell to a low of Rs 5.5 a piece. This is a stock that was trading at around Rs 285 a share in January of 2019

Suresh says that 99% of small investors base their investment decisions on what is being said in news channels, their stock brokers, friends and so on. You are bound to lose money if you do not the right amount of homework

So what do you do?

If you do not have the time or wherewithal to directly invest in stocks, Suresh says you should take the MF route

Select the fund and fund type you want to invest and leave the rest to the fund manager. After all, it is their job to keep a track of the investments and monitor their holdings and take appropriate calls, says Suresh

Keep a track of the health of your bank

Be it what happened at PNB or PMC or Yes Bank… we can't stress this enough.. it is your money and it is just not right to trust some else so blindly with it

We told you that be more vigilant when it comes to your investments?

Now you may ask, S and T, how do we keep track of a bank?

Now, yes, PMC and PNB was not something that we could have tracked using ratios and financial data

But the drama with Yes Bank has been on for a few months now

When something like this happens it is good to keep an eye on the performance of your bank.. there are a few key numbers that can guide you
NPA or non-performing assets are loans the bank has not received interest payment on for the last three months. A very high gross NPA ratio means the asset quality is in very poor shape

Net NPA: Banks write off some NPAs and net NPA is calculated after deducting them. Higher net NPA means the bank's profits will be under pressure in future too.

Total Capital Adequacy Ratio or CAR: Risk weighted assets are calculated after considering all risks. Indian banks are supposed to maintain a CAR of 9%. A high ratio means the bank is safe. It also means the bank can grow faster without diluting capital.

Net Interest Margin: NIM will be high for banks with higher low cost deposits or which command higher lending rates. High NIM and low NPA is a good combination.

Return on Assets: Since a bank's main business is leverage, RoA is a better profitability indicator. Higher RoA indicates a bank is able to utilize its assets well.

These are four important factors that can tell you the health of your bank.. added to this keep an eye out for managerial changes and if there are any internal squabbles within the bank

To conclude, do your homework… it can save you and your money the heart ache

On that note that will be from us for this week

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