Thursday, April 25, 2024
To make sure that their deposits are safe, people should consider some key factors before putting money in a bank, such as its capital adequacy ratio (CAR), compliance, and board members, said former lead economist at the World Bank’s Dhaka office Zahid Hussain.
Aside from living expenses, there are two options the people can choose to invest their surplus money. One option is to invest money in real estate such as land, flats and cars while another option is to invest money in financial assets, said Zahid, also an independent director of BRAC Bank.
Investment in real estate is a long-term investment while investment in financial assets is short-term investment, he said, adding that the areas of investment in financial assets are deposit of money in banks and non-bank financial institutions, insurance policies, stock market, bonds or national savings certificates.
Country’s one of the top macroeconomic analysts said three things should be kept in mind when making investment in financial assets like deposit of money into banks. One thing is that considering inflation, people should invest money in the bank which gives a higher rate of return.
The second thing is that the banks which give higher returns should ensure that the deposited money is safe. If the reputation and performance of the bank is not good, people should avoid the bank for deposit.
He further said people should also bear the bank’s liquidity situation in mind. A bank must have necessary cash so that the depositors can withdraw their money quickly at low cost.
Besides, he said, savers should know how much reserves the banks have with the Bangladesh Bank. As per the central bank rules, there is a requirement to maintain reserves against deposits. The bank having reserve more than requirement may be doing well, he opined.
Apart from this, the economist suggested taking some other things into account. While depositing money, people should see the solvency of the bank. It will show how much the bank is financially strong. A financially-sound bank can quickly return its depositors’ money, he added.
People should know about the banks’ capability of dealing with macroeconomic shocks or any of its own shocks. In this case, its financial capacity should be taken into consideration. “It is called the buffer. It can be seen how much ability the banks have to deal with adverse situation.”
Another factor is the capital adequacy ratio (CAR). The indicator shows the amount of capital comparing to the amount of deposits in the banks. The capital also ensures how the existing depositors will get their money back in time. The higher capital of a bank has higher ability to return money in time.
“The capital means I want to say the paid-up capital and the amount of retained earnings or reserves of a bank.”
Zahid Hussain said the capital adequacy ratio (CAR) threshold for the banks here is 12.5 per cent. If it is less than that, the regulator asked the banks why short fall? The higher CAR banks are in more comfortable situation. So, depositors must keep this in mind.
The economist suggested that depositors should check the bank where he/she wants to deposit money, is under any kind of risk. He said that the risk can be two types, one is internal and the other is external. Internal risks include maturity mismatch and external risk is foreign currency mismatch.
The maturity mismatch is whether a bank collects deposit for a short time but lending for a long time. If the gap widens between deposit and lending, then a mismatch is created as the depositor may not be able to withdraw his/her money when required.
For example, he said, if a bank collects deposits for a period of one month and lending for a period of one year, then the question arises how it can return the money to the depositors after one month.
But if the loan is such that there is inflow every month, then the bank can give the money to depositors. In this situation, there will be no major maturity mismatch and the risk will be less, Zahid said.
The issue of currency mismatch in terms of external is foreign exchange. If the liability of a bank is more than its asset, in terms of USD amount, then this mismatch is created.
“Let’s say a bank has liabilities of $100 in foreign trade, against its total assets of $50. If the exchange rate depreciates by 2 per cent, liabilities will increase to $102 and assets will increase to $51. So, the loss here is $1,” he explained.
If the exchange rate depreciates more, he said, liabilities will increase more than assets. He also advised people to look into this mismatch of a bank when they want to deposit money.
Besides, every bank has a credit rating which rated by the central bank, foreign institutions and internal department of a bank. Depositors should look into those ratings before deposit. “If the rating fluctuates frequently, it should be understood that there is some problems in that bank.”
Calling upon the people to know about bank owners first, he said that a bank may be doing well but if its board members may be involved in irregularities, then deposits in the institution are not safe. “So, depositors should know the background of the board of directors before depositing money.” n
