Why You Should Not Keep All Fixed Deposits in One Bank?

The recent fraud at the New India Co-operative Bank (NICB) has once again raised concerns about the security of deposits in co-operative banks. Since deposit insurance was introduced in 1962, a staggering 430 co-operative banks have failed, endangering the savings of thousands of depositors.

These crises have resulted in an insurance payout of ₹16,000 crore as of March 2024, compared to just ₹296 crore paid out for claims linked to commercial banks. One of the largest payouts occurred in 2022 when ₹3,854 crores was disbursed to 8.69 lakh depositors of the Punjab & Maharashtra Co-operative Bank.

Why Deposit Diversification is Essential?

While higher interest rates may seem appealing, safeguarding your savings should take precedence. Diversifying fixed deposits across multiple banks mitigates risk and ensures that your funds remain secure in case of a bank failure.

The Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the Reserve Bank of India, insures deposits of up to ₹5 lakh per depositor per bank, covering both the principal and interest. Keeping balances below this threshold across multiple banks ensures maximum coverage and financial security.

Choosing the Right Banks for Safety

To protect savings effectively, individuals should distribute their deposits strategically among:

• Public sector banks: These banks are backed by the government, making them the safest choice for holding the bulk of savings.
• Large private banks: These provide a secure alternative for diversification while offering competitive services.
• Small finance banks (SFBs): While they offer higher interest rates, careful selection is necessary to ensure financial stability.
• Co-operative banks (if necessary): If one must deposit funds in a co-operative bank, the amount should be kept to the bare minimum. While deposits up to ₹5 lakh are insured, withdrawals can be delayed in case of a bank crisis.

Additionally, it is advisable to periodically reassess bank choices based on their financial performance and regulatory standing.

Understanding Deposit Insurance Coverage

DICGC insurance covers deposits across various accounts, including:

• Fixed deposits (FDs)
• Savings accounts
• Recurring deposits (RDs)
• Current accounts

The insurance becomes effective if a bank is liquidated or placed under RBI’s all-inclusive directions. In such cases, depositors receive compensation within 2 months from the submission of the claim list. To avoid unnecessary delays, account holders should ensure their account details and KYC information remain up to date.

What NICB Customers Should Do Now

For NICB customers affected by the crisis, taking prompt action can help minimise disruptions:

• Update bank mandates: Ensure payment instructions for automatic debits, such as utility bills, EMIs, and systematic investment plans (SIPs), are transferred to another bank. Each organisation may require separate paperwork.
• Transfer outstanding loans: Borrowers with existing loans at NICB should transfer their balances to a different lender to avoid repayment issues.
• Update employer and pension details: Salary and pension recipients should provide their new bank account details to their employers and the Employees’ Provident Fund Organisation (EPFO).
• Ensure adequate funds in the new account: This prevents failed transactions and disruptions to essential payments.

Conclusion 

The NICB fraud is a stark reminder that bank failures can have serious financial consequences. While deposit insurance provides some protection, the best approach is to diversify savings across multiple banks and ensure balances do not exceed ₹5 lakh per institution. By taking these precautions, depositors can safeguard their funds and maintain financial stability even in times of banking distress.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.

Investments in the securities market are subject to market risks, read all the related documents carefully before investing.