Recently a Cooperative Bank (PMC Bank) in India got bankrupted/failed. It is really unfortunate to see depositors waiting for their money. The event has again showcased, that there is Risk in Everything. The concept of RISK-FREE is a myth. Banks can fail & even countries can. But are Bank FD safe in India? If yes, by how much?

Bank FDs are trusted by millions in India. So in case, there is a delay in payment or default the most affected is the common man. The retirees, the housewives, students & salary seekers face the most of the losses as they have less income. Bank FD sees huge money despite low rates because – they are perceived as SAFE. What if they are not?

The current mechanism of making Bank FD Safe

You should not worry much as RBI has made many provisions in the banking system to keep the banks funded. Banks are required to deposit a certain part with RBI. These are in the form of Cash Reserve Ratio (CRR) & Statutory Liquidity Ratio (SLR).

But these are not in full – a part of the deposit.

RBI also monitors a bank’s financial health and directs banks to adhere to corrective actions. These are called PCA (Prompt Corrective Actions)

Rs 500000/-

RBI also has authorized DICDC (under the Deposit Insurance and Credit Guarantee Corporation Act, 1961) to INSURE the deposits. YES, INSURANCE!

DICDC is owned by RBI. The Corporation insures all bank deposits, such as savings, fixed, current, recurring, etc.

BUT BY RS 500000/- Only!

(UPDATE on 02 Feb 2020: In Budget 2020, the FM announced that the limit is increased to Rs 500000/-. If the Finance Bill becomes Act, the limit will be Rs 5 lakhs from 04 Feb 2020) (Here is the notification)

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(UPDATE on 29 July 2021:

The union cabinet approved the amendment to Deposit Insurance Credit Guarantee Corporation (DICGC) Bill to provide account holders access to up to Rs 5 lakh funds within 90 days of bank failure.

✅ This Bill covers all bank deposits, including commercial banks and foreign bank branches

✅ The insurance covers 98.3% of all deposit accounts and 50.9% according to the data quoted by Finance Minister Nirmala Sitharaman)

Now that’s a PUNCH!

When the corporation started (in 1968), it used to insure only Rs 5000/-. The limit was increased many times. The last revision was in 1993 to Rs 100000/- & now to Rs 500000/- is 2020.

Compare it with other countries:

Brazil and Russia stand at Rs4.5 million and Rs1.2 million USD.

Asian countries are also ahead of India. Philippines insures up to 500,000 pesos ($9,500) per depositor, while Thailand insures close to 5 million bahts ($160,000), according to respective central bank websites. In China, this insurance is for up to 500,000 yuan ($70,000) per depositor. At ₹1 lakh, India’s cover is a small amount of $1,400.

So what is the Risk when you consider BANK FD Safe or “Safest”

Deposits less than Rs 1 Lakh is just 8% of the total deposits.

Hence anything above Rs 500000 is not insured. 92% of deposits are hanging on the mercy of bank performance & god’s will.

One more point – Out of around 2150 Banking License issued by RBI, more than 1900 are Cooperative Banks. Their health is in a doubtful area looking at past failures & recent PMC bank instance.

You will love to read this too Fixed Deposit Vs Mutual Funds : Part 1

Some Facts related to Cooperative Banks:

Nearly 500 banks have failed in the last decade.
Last one year 12 Co-op Banks had settlements with RBI to pay back the deposits of the investors.
One Coop- Bank is failing almost every month.
RBI did not bail PMC Bank simple because there are 2000 more in line. Bailing one would have meant RBI setting a wrong precedence. It is in no position to bail 2000 odd Co-op banks.

Any hope for a Safe Bank FD?

Yes. The government is trying to address this by bringing an Act called Financial Resolution and Deposit Insurance (FRDI) Bill. This bill will address the concerns of depositors in case a Bank or Financial Institution fails.

The Union Finance Minister, in his Budget Speech 2016-17, announced that a comprehensive ‘Code on Resolution of Financial Firms’ will be introduced as a Financial Resolution and Deposit Insurance (FRDI) Bill in the Parliament during 2016-17. The Code will provide a specialized resolution mechanism to deal with bankruptcy situations in banks, insurance companies and other financial sector entities apart from dealing with deposit insurance for banks.

On passing of the FRDI Bill, Resolution Corporation (RC) will be established and DICGC will be subsumed in the RC. Deposit insurance for banks will continue to be handled by RC as presently done by DICGC.

The bill has faced a lot of resistance in Parliament & with the general public. But this is what the future is.

Details Here

What can you do to make your Bank FD safe?

Look at the health of financial institutions you are depositing your hard-earned money.
Spread deposits with multiple banks, small saving schemes & corporate FDs.
Avoid banks with high (relative to what others are offering) rate of deposits.
Invest in Different Names. (beware & adhere to income clubbing & income tax provisions while transferring income)
Prefer Nationalised Banks to Cooperative Banks.
Diversify in Debt Mutual Fund, NCDs & Deposits schemes like Sukanya Samriddi, PMVVY & SCSS.