Depositors presume Bank Fixed Deposits to be 100% risk-free investment, which is not true, there is always an inherent risk associated with any investment, Bank Fixed Deposits are no exception.
You must have read about the Punjab and Maharashtra Co-operative (PMC) Bank and how depositors are finding it difficult to get back their money. Here’s the story if you have not heard about it. PMC bank came into the radar of the Reserve bank of India(RBI) after Housing Development & Infrastructure Ltd and its directors failed to repay a loan worth Rs. 4355 Crore. This put the bank under liquidity stress. What followed was the RBI told PMC bank to stop its business for six months, appointed an administrator to oversee the bank’s business and it introduced restrictions on withdrawals by depositors.
Initially, the RBI said depositors cannot withdraw more than Rs. 1000 per account. After a few protests, this was increased to Rs. 10,000. Further protests followed and the withdrawal amount was hiked to Rs. 25,000. Now, recently the RBI has said that depositors can withdraw as much as Rs. 40,000. It is said that more than 75% of the depositors can withdraw their entire account balance now that the withdrawal amount has been raised.
PMC being a co-operative bank is governed by both the state registrar of co-operative societies as well as RBI. While the state registrar monitors the administration and audit of co-operative banks, RBI regulates banking functions. If it is a multi-state co-operative bank, the central registrar will monitor the administration and audit. So, there could be a possible regulatory lapse.
Does this mean a commercial bank will not have these issues? Not necessarily. Moreover, what will happen to your deposit if your bank faces liquidity issues?
Understand that all commercial, as well as cooperative banks, are insured under the Deposit Insurance and Credit Guarantee Corporation (DICGC). The exceptions are Primary Cooperative Societies. Each depositor of a bank will be covered for a maximum deposit of up to Rs. 1 Lakh. DICGC rules say that all deposits in the current account, savings account, and fixed deposits will be insured. If the total of all the deposits put together exceeds Rs. 1 Lakh, then you will be able to get up to Rs. 1 Lakh. This will be inclusive of the principal and interest amount for your deposit. Note that if your deposit amount is less than Rs. 1 Lakh, you will get only the deposit amount and Rs.1 Lakh. For example, if you have Rs. 90,000 in your deposit, you will get only Rs. 90,000 and not Rs. 1 Lakh.
In case your bank goes under liquidation, you will get back your deposit amount if it is less than Rs. 1 Lakh. What if it is more than Rs. 1 Lakh? You will have to wait for the bank to be shut down. This might take many years depending on the bank’s assets and liabilities. Which are the deposits that are not covered by DICGC?
Types Of Deposits
DICGC covers all bank deposits except the following:
- Deposits of central and state government
- Deposits of a foreign government
- Deposits between banks
- Deposits of State Land Development Banks with the State co-operative bank
- Deposit received outside India
- Any deposit which has been specifically exempted with the approval of RBI
Deposits In Branches
You might have deposits in different branches of the same bank. Now the question is will each of them be covered separately? DICGC covers only deposits in a particular bank. This includes all the branches of the bank as well as all types of accounts in the bank. No matter how many accounts you have in the same bank, you will get only up to Rs. 1 Lakh as a deposit guarantee.
However, if you have accounts in different banks, then you will get DICGC’s insurance coverage for each of the banks. For example, suppose you have Rs. 1 Lakh in bank X and Rs. 1 Lakh in bank Y, you will get a deposit guarantee of Rs. 2 Lakhs (Rs. 1 Lakh for each of the banks).
Does This Apply To Joint Accounts?
Yes. DICGC insures both a single account and joint accounts. They will be covered separately under the DICGC scheme. So, if you have a single account as well as a joint account in the same bank, they will be covered separately.
For example, suppose you have a savings account balance of Rs. 1 Lakh which is solely operated by you and another account with a balance of Rs. 1 Lakh that is jointly operated by you and your spouse. In case your bank goes bankrupt, you will get Rs. 2 Lakh sine both the accounts are insured separately.
What Will Happen To Auto Debits?
Let’s say you have set-up ECS mandates, auto-debits such as insurance payments, bill payments, and SIPs. In case the bank goes bankrupt, these amounts will not be debited from your bank account. Since they won’t go, you will need to use another account to pay for those. You may have to set-up ECS mandates and auto-debits with the help of the other bank where you have the account.
What Should You Do?
Always keep an eye on the financial health of your bank, especially if you are a depositor of a co-operative bank. What are the measures you need to check? Some of the key metrics will be the net Non-Performing Assets (NPA) over the years, return on assets (ROA) and Current Account to Savings Account (CASA) ratio.
Co-operative banks might be riskier than commercial banks because RBI is not the only regulator. RBI is stricter in terms of compliance and regulatory measures when it comes to commercial banks. This includes both the private sector as well as public sector banks. For example, when frauds were detected in Punjab National Bank, RBI was very proactive in setting things right. However, the same cannot be said about co-operative banks.
Even if you want to invest in a co-operative bank, don’t keep all your money in a single bank. It is best to invest in deposits of different banks. In fact, you can look at private banks, public sector banks and small finance banks. If you are a single earning member of the family, this is even more important. If you are young and you have no dependents, consider keeping some money in liquid mutual funds. There are fund houses that give you ATM cards for taking money out of your liquid fund. Remember, diversification of your portfolio will help reduce the risks involved in putting your money to good use.