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.
Fixed Deposits and Recurring Deposits are the most popular financial saving tools in India. It is not an exaggeration to say that most of us might have started the investment plan with an investment in Post office RD or bank Fixed Deposit (FD).
The below table gives you an idea about the total outstanding amount (as on Mar 2019) saved in Bank Term Deposits, based on the tenure of the deposits. (This information is sourced from ‘RBI’s statistical data on Indian Households’ Savings’)
Are Bank Deposits Safe?
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?
As of today (FY 2019-20), 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.
The bank deposits are insured by Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the Reserve Bank of India.
Bank Deposit Insurance of Rs 5 Lakh | Budget 2020
Deposit Insurance Scheme 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.
” 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.”
There has been a huge demand on the Govt / RBI to increase this threshold limit of Deposit Insurance Scheme over the last few years.
In Budget 2020, a proposal has been made to increase the bank deposit insurance cover to Rs 5 Lakh from the existing Rs 1 lakh limit.
Which are all the Banks covered under Deposit Insurance Scheme?
The deposit insurance scheme covers all banks operating in India including private sector, co-operative and even branches of foreign banks in India.
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.
How Does Bank Deposit Insurance Scheme work?
The bank deposits kept in different branches of a bank are aggregated for the purpose of insurance cover and a maximum amount of upto Rs 5 Lakh is paid (if a bank defaults) from FY 2020-21.
For example, if an individual has a bank deposit account with a principal amount of Rs.4,95,000 plus accrued interest of Rs.4,000, the total amount insured by the DICGC would be Rs. 4,99,000.
If, however, the principal amount in that account is Rs 5,00,00 and the accrued interest of Rs 4,000 would not be insured, not because it is interest but because that is 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 Rs 5 lakh.
So, if you want to invest say Rs 15 Lakh, you can consider investing five 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.”
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.
Which is the Safest Bank in India?
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).
What about in India?
Offlate, Banking frauds and NPA (Non-Performing Assets) mess in India have certainly dented the depositors confidence and trust in banking institutions to a great extent. We are all aware of what has happened with Mumbai-based urban cooperative bank, PMC Bank.
RBI issues guidelines for Domestic Systemically Important Banks (D-SIBs) according to which eachyear it discloses the names of banks designated as D-SIB and these are too big to fail. Banks like SBI, ICICI Bank, and HDFC Bank are identified as D-SIB. So, consider big and popular banks (Pvt / PSU) for saving your monies.
I am not sticking my neck-out and saying that these bank will not default. But, even if they do, Govt may not allow them to go bankrupt and may eventually get them merged with some other popular bank.
Also, advisable not to save/invest your entire investible surplus in one bank. It is prudent to avoid banking with Co-operative banks and Small Finance Banks for now. “Higher returns come with higher risk”.
A word of advice : Always make sure you diversify your investment across asset classes to minimize the risk and optimize returns.
You may like reading :
- 15 Q&As on Fixed Deposit Interest Income Taxation Rules (FY 2019-20)
- How to check if a Company can collect Deposits from the Public? (Company FD Schemes)
- List of all Popular Investment Options in India – Features & Snapshot
- RBI’s statistical data on Indian Household Investments & Savings (2018-19) | How & Where do we save & invest?
- New Income Tax Slab Rates Vs Old Tax Regime | Which one is better?
(Image courtesy of [Stuart Miles] / FreeDigitalPhotos.net) (References: Reserve Bank of India documents)