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Sunday, June 11, 2017

How safe is your fixed deposit in India?

The banking sector has been a roller-coaster ride for a while now! After losing 1.3 lakh crore market cap, Banks saw a sharp recovery in the stock performances of about 50% in 2016-17. While the stock market is always a bumpy roller coaster, Indian society of conservative saver, thought Bank to be the safe haven for keeping their wealth.

While capital markets volatility is always under scrutiny, nobody really questioned the sovereignty of the banks. In last decade, banks have come out with a major issue of NPA (where the companies and entities after taking loans, have stopped paying interest and (or) the principal, has turned into a bad asset for banks) and raising substantial capital to comply with Basel III norms. Many public sector Banks struggling with the pressure are taking the route of the merger to cope with the situations. While private players look comparatively well placed, many co-operative banks are coming under scrutiny because of their regional structure and lack of governance systems.

From news "In March, RBI imposed restrictions on Mumbai-based Kapol Co-operative Bank whose depositors were allowed to withdraw only up to Rs 3,000 of the total balance held in every saving bank or current account or any other deposit account, irrespective of the balance.
Every depositor is entitled to receive only up to a monetary ceiling of Rs 1 lakh, of his/her deposits from DICGC

Some facts we don't know- 

  • Incase Bank faces a closure or cancellation of license, you are exposed to risk of losing entire money above Rs. 1 lakh (Insured by DICGC), a wholly owned subsidiary of the Reserve Bank of India (RBI)
  • All bank deposits including Fixed deposits, recurring deposits, saving and current account deposits are insured only up to 1 Lakh per account per bank
  • The DICGC is liable to pay the account holder within two months of claim receipt
  • Deposits in different banks are covered separately by DICGC
  • The insurance premium is paid entirely by the bank
Though public sector banks come with government backing, it is not immune to the challenges.    

In Global Context
In western countries, fixed deposits in banks are well insured. Hence, the bank can go bust but the deposits are much safe than Indian counterparts. Indian banks have a very low coverage of Rs 1 lac. Canada has protection for bank accounts and the Canadian Deposit Insurance Corporation offer covers till $100,000

What you can you do?

  • Choose big public/private sector banks - They are cash rich and comparatively safe
  • Don't choose FDs which offer much higher return than peers. This is a signal of risk
  • You can choose liquid funds and short-term debt funds, they mostly invest in government bonds(risk-free), and high-quality corporate bonds.  They offer higher interest income as well. 

India needs a better insurance cover for fixed deposits.
How safe is your fixed deposit in India?  How safe is your fixed deposit in India?

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