Spread your risks

The central government has raised the insurance for deposits in banks, as proposed in the Budget 2020-21.

What has changed?

The central government has raised the insurance for deposits in banks, as proposed in the Budget 2020-21. Earlier, deposits were insured up to ₹1 lakh; now insurance cover has risen to ₹5 lakh.

What does it mean to you, the depositor?

Deposit Insurance and Credit Guarantee Corporation (DICGC) is a wholly owned subsidiary of the Reserve Bank of India and in case of failure of a bank, the corporation provides cover to bank deposits of customers.

If the bank in which you have deposited funds goes bankrupt, the DICGC will ensure that your deposits are now covered against such risk up to a maximum of ₹5 lakh.

All funds held in ‘the same capacity and right’, as defined by the DICGC, at the same bank are added together before deposit insurance is determined. But, if the funds are in different types of ownership or are deposited in separate banks they would then be separately insured.

For example, if Mr. A has a deposit with a bank in his individual capacity, and also holds an account with his spouse as the secondary holder, then these two accounts would each have deposit insurance cover of up to ₹5 lakh separately.

If Mr. A holds a third account for a minor, say his son Ajit, then the deposit insurance cover would apply separately to this account as well. A fourth account under Mr. A’s name held jointly with his business partner would also be separately insured.

But if you have several accounts of the same type (under one name, with one bank, across multiple accounts, and across branches) the insurance cover would be applicable to all your deposits at a clutch. Assume you have a deposit of ₹13 lakh with the Bandra (Mumbai) branch of a scheduled commercial bank, and ₹6 lakh with the Jayanagar (Bengaluru) branch of the same bank, both in your name. If the bank goes bust, all your deposits together would still be covered only up to ₹5 lakh.

Is it better to distribute money across banks, to make the best of one’s savings?

Yes, it is. For someone with sizeable savings in the form of deposits, it is worth your while to split them up across banks, up to ₹5 lakh per bank. If you have deposits with more than one bank, deposit insurance coverage limit is applied separately to the deposits in each bank.

While the safest option may be to earn interest through deposits with large, nationalised banks, your returns would be minimal, for, such banks don’t offer high interest rates. Some good, Small Finance Banks (SFBs) currently offer better returns on deposits than do large nationalised banks. Choosing a strong SFB and opening deposit accounts may be a good option for those reliant only on interest from deposits for their upkeep.

What does it mean to banks?

Banks now have to cough up more annual insurance premium to DICGC to cover deposits placed with them. From 10 paise per ₹100, the premium has been raised 20% to 12 paise per ₹100 worth of deposits with them, effective April 1, 2020

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