We opt for Bank deposits because they offer, 1) safety and 2) guaranteed returns. Bank deposits can be Fixed Deposits, Recurring Deposits, and Bank balances in Savings or Current accounts. The total bank deposits in India stood at US$ 1,274.3 billion in Financial Year 2013. That’s huge!
I believe that there is no such financial product where it is completely risk free. Bank Deposits are no different. What if a bank goes bankrupt? What happens to the investors’ deposits?
If a bank defaults or goes bankrupt then each depositor in a bank is insured up to a maximum of Rs.1,00,000 only (Rupees One Lakh) for both principal and interest amount held by him.
While the deposits have increased, the level of insured deposits as a percentage of assessable deposits has declined from a high of 75% in FY 1982 to 28% in FY 2018.
The bank deposits kept in different branches of a bank are aggregated for the purpose of insurance cover and a maximum amount upto Rupees one lakh is paid (if a bank defaults) .This is provided by RBI’s Deposit Insurance & Credit Guarantee Corporation (DICGC). It must be noted that the amount was last revised in the year 1993 from the earlier Rs 30,000.
For example, if an individual had an account with a principal amount of Rs.95,000 plus accrued interest of Rs.4,000, the total amount insured by the DICGC would be Rs.99,000. If, however, the principal amount in that account was Rs. On lakh, the accrued interest would not be insured, not because it was interest but because that was the amount over the insurance limit
If an individual opens more than one deposit in one or more branches of the same bank, then all these are considered as accounts held in the same capacity and in the same right. Therefore, the balances in all these accounts are aggregated and maximum insurance cover is available upto rupees one lakh.
Bank Deposits held in joint accounts:
If more than one deposit accounts (Savings, Current, Recurring or Fixed deposit) are jointly held by individuals in one or more branches of a Bank say three individuals Modi, Krishna & Sushma hold more than one joint deposit accounts in which their names appear in the same order then all these accounts are considered as held in the same capacity and in the same right.
Banks have the right to set off any receivable dues from customers against deposit insurance. Deposit insurance premium is borne entirely by the insured bank.
So, if you want to invest say Rs 3 Lakh, you can consider investing one lakh each in three different banks. If you have deposits with more than one bank, deposit insurance coverage limit is applied separately to the deposits in each bank.”
You may ask, do banks go bankrupt? Answer is we may all know what has happened in United States of America in 2008/2009 (Financial Crisis).
The Reserve Bank’s credit insurance arm has paid over Rs 142 crores to depositors of 19 cooperative banks that have gone bankrupt in 2008-09. During 2007-08, as many as 22 cooperative banks closed operations.
Among the 19 failed cooperative banks, the highest amount of Rs45.41 crore was paid to depositors of Co-operative Bank Ltd, Gonda, UP; followed by The Maratha Co-operative Bank Ltd, Hubli, Karnataka (Rs17.75 crore); Parivartan Co-operative Bank Ltd, Mumbai, Maharashtra (Rs16.71 crore); Ravi Co-op Bank Ltd, Kolhapur, Maharashtra (Rs16.23 crore) and Indira Priyadarshini Mahila Nagarik Sahakari Bank Ltd, Raipur, Chhattisgarh (Rs13.17 crore).
Banking frauds and NPA (Non-Performing Assets) mess have certainly dented the depositors confidence and trust in banking institutions to a great extent.
As per media reports, the DICGC has started the process to revamp the archaic deposit insurance scheme. After approvals from the finance ministry and the central bank, the insurance limit may be increased and can be different for individual and institutional depositors. DICGC may also consider giving banks an option to pay a higher premium to insure a larger amount.
The discussion is in its initial stages and a decision will only be taken after consulting all the stakeholders.
Meanwhile, kindly make sure you diversify your investment across asset classes to minimize the risk and optimize returns.
(Image courtesy of [Stuart Miles] / FreeDigitalPhotos.net) (References: Reserve Bank of India documents)
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