I recently met a 85 year old man who has all his investments in bank deposits and post office deposits. This is a good portfolio – and he has about Rs. 12 lakhs. As his income is below taxable level he does not pay Income tax, nor does he file his IT return.

He had Rs. 400,000 and he had to invest in bank fixed deposits. To avoid IT (and reduce risk, his language, not mine) he had kept it as 8 FDs of Rs. 50k each – a few pay quarterly and one or 2 pay interest annually. So far so good, no hassles.

All the deposits were in a single name and he had made his son the nominee – he is a widower – so this was also fair and logical. Also some of the post office deposits (senior citizen scheme) he could not make his son the joint owner, so the son is a nominee and not a joint holder.

He is now going into a old age home in a different city – so the son wanted to operate the account – and the mess came to light.

3 FD forms are not traceable. One bank had not ISSUED the FDR even though the FD was made about 2 months ago. 2 banks had made him open a savings bank account just to credit the Quarterly interest.

He now had 5 savings bank account, 12 banks to deal with, multiple FDs where the interest had to be collected (obviously it would go back from the ‘address on account’) – and the son was staying in a different city.

Out of the 12 banks he had to deal with, 5 were banks where I would not leave a rupee! Co-operative banks based in Mumbai and its suburbs – and nobody had a clue about the quality of balance sheets.

The son was exasperated – he had to type/ print so many letters, explain what had happened, apply for PIN numbers, ATM cards, give a few dozens of photographs, PAN card photocopies, …..the clerical work was just astounding.

The most important thing was he told me “THERE IS NO RISK IN KEEPING MONEY IN ANY BANK – I have always been protected”.

This comes from the fact that whenever he has kept money in an organisation with the name ‘bank’ he has been protected. This man had kept money in GTB – Global Trust Bank. Even in this bank the shareholders lost ALL their money, but the deposit holders were protected.

If you see the RBI stance – they have protected your FD immaterial of which bank your money was lying in. Bank of Rajasthan – became part of ICICI.

So the general feeling is ‘bank FDs are risk free’ – and the risks are not priced. So if a SBI pays 8%p.a. interest BUT a Suku Bank pays 11%p.a. RBI DOES NOT SEE THE PRICING DIFFERENCE AS RISK….

If we do not let banks fail – thus hurting people, they will continue to chase rainbows of ‘risk adjusted returns’ – simply because risk is zero in debt!!

Who was asking why Indians do not invest in equities? Simple debt returns are superb – esp with risk at zero 🙂