What happens to deposits of account holders if a DICGC insured bank fails in India? In India, a majority of people have some money parked in bank FDs as these are perceived to be the safest way to save money.
The banks in India are quite safe given RBI’s solid supervision. And that is one reason why bank failures have not been common in the recent past. But still, it’s better to know how Deposit Insurance and Credit Guarantee Corporation or DICGC’s insurance coverage helps if a bank fails. Will the failed bank repay back your deposits? If yes, then in full or lesser amount? And by when will you get your money back in case of a bank failure.
How DICGC insures your Bank Deposits?
- DICGC (Deposit Insurance and Credit Guarantee Corporation), a subsidiary of the RBI, was formed to protects the depositors in case a bank fails.
- It offers insurance cover for all deposits such as savings, fixed, current, recurring, etc. deposits. opened with scheduled banks.
- Each depositor in a bank is insured up to a maximum of Rs 5 lakh (or DICGC limit of Rs 5,00,000) for both principal and interest amount. This means that you will have an insurance cover (for your deposits) up to Rs 5 lakh if your bank fails. Any amount above it may be lost. So that is you your DICGC insurance coverage for Bank FD if a bank fails.
- The deposits kept in different branches of the same bank are aggregated for the purpose of insurance cover (at bank level) and then a maximum amount of up to Rs 5 lakh is paid from cover.
- But if you have deposits with more than one bank, then the deposit insurance coverage limit is applied separately to the deposits in each bank. So if you have Rs 20 lakh in one bank, then only Rs 5 lakh is insured (in case of a bank failure). But if you keep Rs 5 lakh each in 4 different banks, then each amount of Rs 5 lakh in each of the four banks is individually insured.
How much money is guaranteed if a bank fails in India? The answer is Rs 5 lakh per depositor per bank.
Which banks are insured by the DICGC? I have already done a detailed post on this and you can read it here at latest DICGC insured banks in India.
And if you are curious about which are the safe banks in India to deposit your money, then do check which 3 banks, as per RBI, are the safest banks in India.
The deposit insurance guarantee scheme was set up first in 1961. This coverage was increased from Rs 30,000 to Rs 1 lakh in 1993. The DICGC further enhanced the cover to Rs 5 lakh in 2021. To have such a cover, each bank has to pay an annual premium of about Rs 12 paise per Rs 100 of assessable deposits to the DICGC. This premium is paid by the banks and not the account holders.
I know, those of you who have very large amounts parked in bank FDs, may feel that the Rs 5 lakh deposit insurance cover is not enough. But it is what it is and we need to accept it and pick our FD strategy accordingly.
How to Deposit large amounts in DICGC banks?
If you have a large amount that you want to put in bank deposits, then here are some pointers to get you thinking:
- Understand that each bank only offers Rs 5 lakh insurance cover for deposits and hence, its better to diversify and spread your fixed deposits across a few banks.
- Put about 70% in the RBI-identified Systematically Important Banks. The rest can be parked in other banks that may seem attractive to you as they may be offering higher rates.
- You might be tempted to earn higher FD rates but unless you are a adventurous cowboy with large deposits, it is advisable to not be too greedy for a few basis points of extra returns. Simply spread your deposits across SIBs. If not all, then at least a major chunk.
- Since the insurance limit is Rs 5 lakh per depositor per bank, you can also spread money across family members to use the Rs 5 lakh cover for each member instead of just one person.
- At least for your emergency fund, stick with the RBI’s systemically important banks or the larger ones in India.
- And just because you have DICGC cover doesn’t mean you will get your money back instantly in case of bank failure. In past, there have been instances where several months to years to get your money back. As per the DICGC annual report, it took 508 days for the depositors to get their claims in FY20. This figure was far worse in FY19, when the claim settlement period was averaging at 1425 days or 3-5 years! So build in the possibility (at least in your expectations) that a bank failure may lead to the freezing of your accounts for a while and you may only get back your money after some time. The RBI is making efforts to reduce this time nowadays.
So that was about your Bank FDs and whether your Bank has Deposit Insurance and Credit Guarantee(DICGC)? The DICGC guarantee of Rs 5 lakh does bring some peace of mind for those who are worried about How DICGC insurance scheme help when a bank fails in India?