The Union Cabinet, on July 28, cleared the Deposit Insurance and Credit Guarantee Corporation (Amendment Bill). As per the Bill, depositors of troubled banks would get back amounts below Rs 5 lakh within 90 days, even if a bank is put under moratorium by the Reserve Bank of India.
"As per the bill approved by the Cabinet, each depositor's bank deposit is insured up to Rs 5 lakh in each bank for both principal and interest. Increase of insured amount from Rs 1 lakh to Rs 5 lakh will cover 98.3 percent of all deposit accounts and 50.9 percent of deposit value," Union Finance Minister Nirmala Sitharaman said.
This is a historic decision taken by the Modi government for the protection of interests of small depositors across the country.
The insurance cover offered by DICGC is applicable on deposits such as savings accounts, fixed deposits (FD), current accounts, recurring deposits (RD), etc. However, there are few deposits that are excluded, such as the deposits of foreign governments, central/state governments, the state land development banks with a state co-operative bank, inter-bank deposits, etc.
All commercial banks, including branches of foreign banks functioning in India, local area banks and regional rural banks are insured by the DICGC. At present, all co-operative banks are covered by the DICGC.
However, deposits in primary cooperative societies are not insured by the DICGC, deposits in any NBFCs or Housing Finance Companies or corporate entity do not enjoy this insurance cover.
Many depositors have more than Rs 5 lakh in their fixed deposit accounts with a single bank. Retirees who get lump sum gratuity and provident funds usually put their money in term deposits because of the safety and security.
What should a depositor do if you have, say, Rs 50 lakh in fixed deposit accounts in a single bank?
Since only Rs 5 lakh is covered under the insurance policy, people can’t leave it to chance and should proactively manage their savings. There are two ways to manage it.
1. Open FD accounts with multiple banks
There are 12 public sector and 19 private sector banks in India. If you have Rs 50 lakh worth of FDs in a single bank, you can distribute them among 10 banks, with Rs 5 lakh each.
Since the covered amount includes interest as well, you can shift accumulated interest on all FDs after their maturity of say 1, 3 or 5 years amongst more banks in multiples of Rs 5 lakh each.
Let’s say you opted for 3-year FDs in all the 10 banks. At the end of 3 years you would have earned interest of around Rs 8 lakh at current interest rates. You can park this Rs 8 lakh in 2 more FDs with two more banks.
Technically, you can have Rs 1.5 crore worth of FDs in your name insured by DICGC (31 banks multiplied by Rs 5 lakh each).
I have not included here foriegn banks and regional rural banks.
It may sound cumbersome to operate so many accounts, but as the adage goes there is no gain without pain.
With video KYC and online banking, opening FDs in 10 banks would not be as tedious as it would have been before the pandemic.
2. Open different types of FD accounts in the same bank
As per the DICGC guidelines, each depositor in a bank is insured up to a maximum of Rs 5 lakh for both principal and interest amounts held by her/him in the same right and same capacity as on the date of liquidation / cancellation of the bank's license or the date on which the scheme of amalgamation / merger/ reconstruction comes into force.
What this means is that If you hold deposits in different rights and capacities, each of your deposits will enjoy a cover of Rs 5 lakh separately in the same bank, as per DICGC guidelines.
Let me explain, let’s say the above person in our example who has Rs 50 lakh worth of FDs is married, has two children and lives with his parents.
If he structures his FD in the following manner:
Rs 5 lakh in his name
Rs 5 lakh in his first child name
Rs 5 lakh in his second child name
Rs 5 lakh in joint account with his wife with him as first holder
Rs 5 lakh in joint account with his wife as first holder
Rs 5 lakh in joint account with his father with him as first holder
Rs 5 lakh in joint account with his father as first holder
Rs 5 lakh in joint account with his mother with him as first holder
Rs 5 lakh in joint account with his mother as first holder
Further permutations and combinations are also possible. That would become more complex though. This way an individual can have Rs 45 lakh worth of FDs insured by the government for free in the same bank.
The above structure can be repeated for his wife, father and mother. That would take the total to Rs 1.8 crore.
So, don’t wait for lightning to strike, make adjustments in your FDs with banks based on the two options as per your convenience.
This way you can have a sound sleep and not fret about your money with this free government insurance announcement.