Don’t put all your eggs in one basket

Imagine not having access to money for 10-12 days, especially at a time when you need to clear pending bills. And that too for no real fault of yours.

Recently, Delhi-based Alok Sharma got caught in such a situation when his bank froze the only savings account he had over a small dispute. Another customer of the same bank had erroneously credited a small amount in Sharma’s account and had informed the bank about the mistake soon after.

“I had an insurance policy premium to pay and certain bills to settle, besides meeting my day-to-day expenditure. But I had all my savings in that account and I was forced to borrow from friends,” said Sharma. For Sharma the experience served a lesson. Though we believe that you should not have more than two savings accounts, Sharma's example poses a larger question: Should you limit all your banking transactions to one bank?

What works

Limiting yourself to one bank has its advantages. It offers you the convenience of a one-stop shop for all your banking activities and. It may help cut your paperwork. For instance, if your demat account and savings account is with the same bank, you can link them for investments. Similarly, if you have a credit card with the same bank, you can make payments seamlessly. Some banks even reward you for having multiple relationships. Moreover, a good relationship with your bank can help you bargain on the rates of a loan you may need to take.

What doesn’t

You may lose during disputes: A single bank approach may work well till the time you do not have any dispute with the bank. The Contract Act, 1872, gives banks the right to lien the borrower's savings against any debt taken from the bank. The right to lien empowers banks to keep the assets of a borrower till the time the debt is settled, and even sell the assets. But a payment default can happen for no fault of yours; cases of fraud and erroneous billing are two such circumstances.

“If there is a dispute between the bank and the customer, say, involving R50,000, the bank has the power to freeze an equivalent amount of savings that the customer may be having with the bank,” said an official of a private sector bank on the condition of anonymity.

Banks can exercise their right to lien on all kinds of assets, including savings deposits, fixed deposits and other securities such as shares. However, banks cannot impose a lien if the defaulter is an individual but the savings maintained is in joint name. “To impose a lien, the necessary condition is that accounts should be in the same name. So, if an individual has taken a loan and has defaulted but holds a fixed deposit jointly, the bank cannot lien,” said MR Umarji, chief adviser (legal), Indian Banks’ Association.

So, if you are in a situation where the bank settles your credit card bill from your savings deposit, you would be stuck.

You would be unable to diversify risk: Keeping all deposits in one bank may put your money at risk at times. In case of a bank failure, though rare, you are again at the risk of losing your savings. However, you may be able to recover up to R1 lakh, a sum insured by the Deposit Insurance and Credit Guarantee Corporation for each customer.

Bargain on interest rate may not work for you: You may bargain and get a loan at a rate that is 50 basis points lower than the rate for other bank customers, but it may still be higher than what other banks may be offering in the market.

What you should do

Dealing with one bank may help you track all accounts at one go, but the disadvantages weigh heavily against the benefits such an approach offers. Too many banks can add unwanted clutter in your life. “For normal banking activities, one should not deal with more than two-three banks,” said Gaurav Mashruwala, a Mumbai-based certified financial planner.

What is needed is a balanced approach, wherein your risks are diversified and your loan choice informed.