There’s no need to worry yet because Indian banks still look solid despite the global panic

Wall Street’s woes have triggered a global panic that has even washed up on Indian shores, where equity markets have fallen by nearly 50 per cent from their January peak.

Investors are panicking not just about equity markets but they’re also worried about the safety of their bank deposits given the collapse of banking institutions in the West. Making things worse are rumours about the possible exposure risks of Indian banks like ICICI Bank.

What should investors do in such a situation? Says Sandeep Shanbhag, director, Wonderland Consultants: “There’s no reason to panic. There’s always a cause and effect, but in India, we’re looking at the effect and not the cause.”

The root of the global credit crisis, after all, lies in the sub-prime securities. “Now, our regulatory agencies did not make it possible to deal in such securities. So we’re insulated against the root cause of it though not the potential damage,” he says.

So what protection does an Indian investor have against such damage? Bank deposits are covered under a deposit insurance scheme operated by the Deposit Insurance and Credit Guarantee Corporation (DICGC). The DICGC covers all commercial banks, including branches of foreign banks in India, local area banks, regional rural banks and most co-operative banks.

Should a bank go belly-up, every depositor’s money in that bank will be insured, but only up to Rs 1 lakh of the principal and interest combined. That’s small especially when western governments are giving full deposit guarantees. But the Reserve Bank of India has been reiterating that Indian banks have enough capital, and are not at risk.

What about other investments? The public provident fund and senior citizen savings schemes carry what Shanbhag calls “an implied government guarantee”.

But there’s really no protection for capital market investments — be it equities, debt, mutual funds or unit-linked insurance policies. “People don’t complain when the markets are rising, but when it starts falling, they now want government protection,” says investment advisor Gaurav Mashruwala. He adds: “It’s a cycle. You can’t have a perpetual rise or a perpetual fall either. Things will recover but no one knows when.”

Should investors then cut their losses? Says Mashru-wala: “If you’re in penny stocks, you should get out.” Also, if you have taken loans, try and pay these off first, he advises. After doing this, investors could take a “wait and watch” approach. He advises investors with financial goals that are seven to nine years away to stay invested in equities. Those who have a two-three year horizon, should invest in debt, while a debt-equity mix should work for the interim period.

Shanbhag too believes that although investors’ “risk tolerance is at test now”, they should stick to their asset allocation and investment plans.

What’s more, financial advisors believe this may be a good time to enter equities. Says Shanbhag: “You should make staggered purchases with the Sensex on the way down. This is a once-in-a-lifetime opportunity with securities at such cheap prices.”

By Aarti Dua