Market indicators clearly show an upward trend in Fixed Deposit (FD) interest rates in the finance industry. The financial industry is also aggressively canvassing deposits from the public to fill the gaps in their cash flows.
Considering the bad experience of many hapless depositors in the recent past, it is good to have some idea about the Financial industry, along with the selection criteria on how to select a financial institution, before you open a FD.
High-Interest rates are tempting in the present economic scenario. Consumers are struggling to make ends meet, without adequate income. Investments in other avenues are also very tricky.
There is no assurance that new business ventures are risk-proof. The share market is also down, and there is no hope of a visible upturn in the near future. Salaries are also not up to expectations. Under these circumstances it appears that the safest place for the public to put their hard earned money, is in Fixed Deposits.
Then the question arises, is my money safe? Sri Lankans have seen a succession of failed financial institutions and seen the plight of their depositors, in the recent past. When monies are invested many aspects have to be considered for safety, despite the fact that rates of Interest are very attractive.
Do not go by attractive eye-catching advertisements and propaganda alone. This article will cover the important aspects which should be considered before a bank or a Finance company is selected by you to deposit your hard earned money.
Considering market conditions, it is a good time to open a fixed deposit and lock in at a high rate of Interest before the interest- rate cycle turns. However, the institution in which your deposit is placed is the key factor. The common saying, which is very true, is not to ‘put all your eggs in one basket’. Therefore, you should invest your money in several different financial institutions. However, have the core, (say, the capital which gives you interest which will meet your important monthly expenses), in a well-established institution with a good rating. Preferably in an AAA-rated government bank. Under no circumstances should the capital be touched as the return on Investment of this deposit should take care of your essential expenses such as your monthly grocery bill, medical expenses and utility bills.
If you do this and stick to it, you will not face the consequences of bad investment decisions which will deprive you of your basic living standard.
Statistics of the banking sector
There are 33 banks in Sri Lanka and they are categorised as Licensed Commercial Banks (LCB) and Licensed Specialized Banks (LSB). Of them six are in the large bank category, five are in the medium bank category and 22 are in the small bank category.
When the asset base is more than Rs. 500 bn those banks are categorised as large banks. Of the large six banks, one bank has assets of over Rs. 2 trillion, three banks have assets between Rs. 1-2 trillion and two banks have assets between Rs. 500 bn and 1 trillion. Under the large category, three State-owned banks and three privately owned banks exist. Under the medium bank category, two banks exist with Rs. 400 bn to Rs. 300 bn of assets and another three banks exist with Rs. 200 bn to Rs. 300 bn.
In this category, four private banks and one foreign bank exist. Under the small bank category, four banks exist with assets between Rs. 100 bn to Rs. 200 bn while 18 banks exist with less than Rs. 100 bn in assets. Under this category four private banks, 12 foreign banks and six licensed specialised banks (LSBs) exist.
The entire banking industry consists of an asset base of more than Rs. 10 trillion. It has over 3,500 branches and has 55,000 employees.
Statistics of non-banking sector
There are 43 Licensed Finance Companies (LFCs) and five Specialized Leasing Companies (SLCs) around the country which are registered under the Central Bank of Sri Lanka (CBSL) with a total asset base of Rs. 1.3 trillion.
The non-banking financial industry has around 1,300 branches and about 32,000 employees. The notable factor is that 85% of the industry is being dominated by the top 20 finance companies.
The main feature in the selection criteria of a financial institution -
Select your bank or the finance company from the CBSL registered list of banks and finance companies and not otherwise. To find them out type ‘Authorised Financial Institutions under the CBSL’ on the internet. After you find the list, the individual information of banks and companies you prefer can be viewed by visiting the respective websites.
Features of a Fixed Deposit
You can open a Fixed Deposit with any bank or financial institution providing a competitive interest rate using simple documentation, and by visiting a bank or a finance company. But make sure that you are in a position to justify how you earned your funds.
All financial institutes are supposed to get a declaration from their customers confirming the source of funding. It is known as the ‘Know Your Customer (KYC)’ declaration.
The Rate of Return on a fixed deposit varies on the basis of the amount invested, tenure for which it is invested and the issuing bank or financial institution based on the ceiling given by the CBSL.
Interest is also paid at regular intervals or at the time of maturity on a FD. You can choose the fixed deposit interest to be paid on a monthly, quarterly, half-yearly, annually or at the time of maturity. While fixed deposit interest rates tend to change over time, you can earn high interest on fixed deposits. But, once invested your fixed deposit interest rate will not be changed.
Basic information that can be analysed by looking at the financial statements –
You don’t have to be an accountant to study financial information which is available in the published accounts of a financial institution. It is advisable to check financial information for at least three preceding years, before an investment is made.
Get a piece of paper or use your computer and draw a table (a draft is shown) which can give you the comparisons of the same indicator for the past three years. These are known as Key Performance Indicators (KPIs). It is suggested to compare the stated indicators in your table.
Size of the financial institution
Size matters as far as the stability of the organisation is concerned. It is advisable to select large ones as they can absorb unpredictable shocks in the economy, compared to small entities.
To find out the size of the entity, it is the Asset Base, mainly, that you have to take into consideration. You will find that the assets mainly consist of loan and lease portfolios in the Balance Sheet/Statement of financial position.
After this exercise is done fully you will find out yourself the earlier stated top six banks and the top finance companies in the country.
Out of the list prepared now, you can select your preferred ones. The preferred ones can be based on the rate of Interest as that is what matters most to you. You can consider about 3-4 banks and 2-3 finance companies. Update the following table for you to get a better understanding of the financial institution in which you are planning to deposit your hard earned money.
All this information is available on their websites under published financials, for you to go through. If not you can visit one of their offices or branches and get this information. All financial institutions are supposed to display their financials.
Operating results – If an inclined trend is seen in Net interest income, Profit before taxation (PBT) and Profit after taxation (PAT), it is a positive sign.
Financial position - If an inclined trend is seen in Total assets, Lending portfolio, Deposits, Equity, and Borrowings (to compensate lending), it is a positive sign.
However, if an inclined trend is seen in Non- performing Advances or loans (NPL/NPA), it is a negative sign.
Statutory ratios - If improvement is seen in Equity to deposits ratio and Liquidity ratio, it is a positive sign.
Other ratios - If improvement is seen in Return on assets (ROA), Return on equity (ROE) and Net interest margin (NIM), it is a positive sign.
However, if an inclined trend is seen in Non- performing Advances or loans (NPL/NPA) ratio, it is a negative sign. This information will give you a good understanding of the on-going stability of the institute in which you are planning to deposit your hard earned money. These facts have been found–out based on published financial statistics.
In the next article, we will discuss how the stability of a financial institution is figured-out based on the non-financial statistical data and some of the hidden facts relevant to Fixed Deposits which are relevant to you.
The writer is a former banker