How safe is your Bank Fixed Deposit?

Most people consider their bank fixed deposits extremely safe but some recent events in Cyprus (an euro zone country) bust this myth of safety of bank deposits. The Cyprus government has decided to use the depositors’ money in bank account to pay off its debts. Deposits greater than €100,000 were frozen by the government but deposits of up to €100,000 remain protected. This is because deposits in banks up to €100,000 is insured while above €100,000 are uninsured. So the deposit that is insured would be untouched.

If such a thing can happen in Cyprus, the question is can it happen in India and how safe is your deposit with banks?

Here are some facts about your bank deposits in India:

• In case of bank closure, license cancellation or liquidation etc, you can lose the entire amount deposited except the amount which has deposit insurance
• Your deposits and interests up to 1 lakh with banks is insured by Deposit Insurance and Credit Guarantee Corporation (DICGC) which is wholly owned subsidiary of the Reserve Bank of India (RBI)
• All kinds of deposits with banks like fixed deposits, recurring deposits, saving and current account deposits are covered (limited to Rs 1 Lakh per customer per bank)
• The DICGC is liable to pay the depositors the claimed amount within two months of claim receipt
• If you have deposits with more than one bank, the cover will be separate for different accounts
• The cost of deposit insurance premium is borne entirely by the insured bank
• Currently all commercial banks including branches of foreign banks functioning in India, local area banks and regional rural banks and cooperative bank are insured
• Deposits of foreign governments, deposits of central and state governments, inter-bank deposits, deposits of the state land development banks with the state co-operative bank is not insured

What should you do?

Given the above situation, you should be careful about choosing your bank.

• The public sector banks are the safest as they are backed by government of India. In case there is some problem with the bank, the government would bail it out in most cases. Remember Government can print currency!
• The bigger private banks are also a safe bet. They are generally too big to fail, as failure of a large bank would lead to domino effect taking a lot of smaller banks with it. Remember the bigger banks like Citibank in US were bailed out while the smaller ones were left to survive.
• Usually smaller co-operative banks have higher risk of license cancellation or closure. So if you must bank with them try to keep your deposit within 1 Lakh limit. If you look in the past, RBI has cancelled licenses of several co-operative banks like Bharuch Nagarik Sahakari Bank Ltd, Chatrapur Co-operative Bank Ltd, Nagari Audyogik Sahakari Bank Niyamit, Ghaziabad Urban Cooperative Bank.

So to be on the safer side, you should diversify your deposits in different banks and bank mainly with bigger well known banks.