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Fixed Deposits Losing their Safety Tag?
Dec 26, 2017


The Financial Resolution and Deposit Insurance (FRDI) Bill on the table at the Parliament is already giving the common man sleepless nights. And the one concerning clause causing this insomnia is the provision for a 'bail in'. In essence, the bill empowers a distressed financial institution to utilise its own public deposits to set its house in order.

Only Rs 0.1 million worth of bank fixed deposits are presently insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC). What the FDRI Bill proposes is, to utilise deposits above the insurable limit of Rs 0.1 million by converting the funds into shares of the bank. In other words, the FRDI Bill is simply an extension of the DICGC Act and is not draconian as it is made out to be.

It simply bypasses the bitter truth that the insurance cover for public deposits is woefully low. Sample this, even the BRIC countries like Brazil and Russia have comparative insurance covers of Rs 4.2 million and Rs 1.2 million, respectively. Also, smaller countries like Honduras and Ukraine provide much higher insurance cover for public deposits. But in the absence of social security programs in India, fixed deposits continue to remain a preferred investment vehicle. No wonder, the share of insured deposits has fallen drastically from 75% to less than one third in the last two decades.

The inadequate insurance cover compounds the risk for a vast majority of the population, particularly retirees and senior citizens, who rely on bank fixed deposits for social security cover. With 67% of the total bank accounts having deposits of less than Rs 0.1 million, the small depositors may seem well guarded against bank failures. However, the false sense of security becomes apparent considering that this segment of deposit holders has a mere 8% share in the overall deposit base. In contrast, accounts with deposits of over Rs 1.5 million but less than Rs 10 million constitute 17% of the overall deposit base, with an average deposit size of Rs 3.7 million.

A majority of these high-value deposits are likely to be retirement nest-eggs senior citizens have saved to fund their family needs such as a kid's marriage, higher education, or a medical emergency. Unfortunately, they are likely to be hit the hardest in the event of a bank failure. Therefore, apart from firefighting measures to salvage financial institutions, it is equally important to safe-guard the interest of small deposit holders. And the much needed solution is to raise the insurance cover in order to protect the hard-earned money of the common man.

Data Source: SBI EcoWrap

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4 Responses to "Fixed Deposits Losing their Safety Tag?"

Chandramouli

Jan 8, 2018

Go back to the old adage. "Caveat Emptor".Govt told the people, through the banks " don't depend on us".Any amount of added assurance is only hogwash.This govt does not need any parliament approval for passing a finance bill.we have already witnessed it.

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Pankaj Prasoon

Dec 28, 2017

Very apt article. But what is the safe heaven for the depositors?
Being active in the market,I cannot find any safe heaven.Indian Banks are surviving on these deposits.We are aware of what is happening on lending side.

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Pankaj Prasoon

Dec 28, 2017

Very apt article. But what is the safe heaven for the depositors?
Being active in the market,I cannot find any safe heaven.Indian Banks are surviving on these deposits.We are aware of what is happening on lending side.

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anuradha

Dec 26, 2017

Good

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