Bank Fixed Deposits are considered as one of the safest instrument tools to save money for future emergencies and also earn attractive returns on the funds deposited for a short term, medium-term and long term depending on the investment goal. But is the bank fixed deposit 100% safe?
Let’s understand the credibility of lending institutions, and are our funds safe with them?
There were many examples in the past when financial institutions turned into a default. The recent case of Yes Bank, where the banking operations were suspended for at least a month before it was allowed to resume its operations demonstrates that banks can face severe challenges other than maintaining liquidity.
Punjab and Maharashtra Co-operative bank faced a liquidity crisis when Housing Development & Infrastructure Ltd failed to repay the loan worth Rs. 4355 Crore to the bank. The initial phase included limiting borrowers to withdraw funds from their account. The limit for withdrawal was fixed at Rs. 1000 and customers could not exceed more than the determined threshold. However, after several protests, the limit for withdrawal was exceeded before customers were allowed to withdraw the entire deposits. Thus, it cannot be assumed that our deposits are 100% safe with the lending institutions.
So should we invest in a bank fixed deposit?
The funds deposited in a bank fixed deposits are insured by Deposit Insurance and Credit Guarantee Corporation (DICGC) which is a wholly-owned subsidiary of the RBI.
So are there any limits for an insurance cover provided by DICGC?
Yes, DICGC provides an insurance cover against all types of bank deposits such as amounts deposited in Savings/ Current Account and Fixed Deposits etc. for upto Rs. 5 Lakhs. This amount will be inclusive of Interest and Principal amount. So for example, if you have funds totalling Rs. 5 Lakhs then you would be provided Rs. 5 Lakhs excluding any Interest amount.
Smart ways to deposit your money safely: There are ways through which you can keep your bank fixed deposit safe.
Types of Deposits: DICGC provides an Insurance cover on bank deposits except for the deposits of State and Central government, foreign government, between banks, co-operative banks etc. Thus, it is essential that you must not deposit your funds in these fixed deposits.
Invest in multiple banks: To get an insurance cover, you must deposit your money in various banks. For instance, instead of depositing an entire amount of Rs. 5 Lakh in a single bank. You can deposit 2 Lakhs in Bank X and 3 Lakhs in Bank Y.
Invest in different accounts: Deposit Insurance and Credit Guarantee Corporation (DICGC) provides insurance cover separately in different accounts. For instance, if you have a single FD account in a bank and a joint holding FD account in the same bank, then you are eligible to get an insurance cover for both the accounts.
Keeping an eye on the credibility of financial institutions: It is significant to check the reliability of financial institutions before investing in an FD. To check the credibility, you must keep an eye on credit ratings provided by recognised credit rating agencies. Thus, having an idea about non-performing assets, the performance of the institutions, returns and profits from the deposits is a factor along with high rates on FD.
Conclusion: Thus, it is crucial to check the financial health of lending institutions primarily if you are investing your money in a co-operative bank. Investing in multiple FDs with different lending institutions can help you to keep your deposits safe.