FRDI Bill: How safe is your bank deposits

With so much being discussed about the new FRDI Bill there is hue & cry about how safe your bank deposits are. There are two facets to that discussion in case your bank becomes bankrupt. Firstly in case of distress will the bank wind up or will it be bailed out by the government. Historically we have generally seen that especially with PSU/ larger private banks, weaker banks have been merged with stronger banks & thus question monetary loss has not arisen. Secondly, if the government does not bail out the bank then technically how much money you will get back comes up.

Under the current Deposit Insurance and Credit Guarantee Corporation Act, 1961, any amount of more than Rs.1 lakh in a deposit account could be forfeited in the event of a bank failure. However, the FRDI Bill proposes a resolution corporation would be set up and it in consultation with the RBI fix the threshold for deposit insurance. This suggests that the government is considering increasing the insured amount in bank deposits since the compensation was last fixed almost 25 years ago.

25 years ago only a small part of the accounts held more than Rs.1 lakh. Today, the government may have to raise the deposit insurance cover by more than 12 times in the proposed insurance bill to ensure a safety net for at least 90% of bank deposits. This was the benchmark when the limit was last revised. As of March 2016, 97% of deposit accounts had Rs.15 lakh or less.

Now the question is what is the cost of insuring this deposit? Currently, banks pay a premium of about 10 paisa per Rs.100 insured. A hike in the threshold by ~12X-15X would raise the amount of premium that banks will have to shell out substantially.

Can the banks afford to bear the higher premium cost? At present, the banks pay the premium themselves, but if it goes up the customers should have to bear the cost directly (annual charge/fees) or indirectly (increased minimum balance). So there could be a cost to keeping your deposits safe. Be ready to pay for it.

Bank Fixed Deposits are considered one of the safest avenues for investment. Currently even that is being questioned. Going ahead we should take into account the cost of keeping our money safe in the banks when we consider bank FDs to other investment avenues like bonds & debt mutual funds.

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Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

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