Bank deposits in India are traditionally considered 100% safe. This is because most of India’s banks were owned by the government. Although this is still mostly the case, this picture is gradually changing. Private banks and non-traditional banks such as small finance and payments banks account for growing shares of the banking pie.
Government ownership is also no guarantee of prudence with public sector banks being at the centre of India’s Non-Performing asset (NPA) crisis. In this article, we tell you how safe your money in an Indian bank is and how that can change.
Deposit guarantee insurance
Under the Deposit Insurance and Credit Guarantee Corporation Act (DICGC), 1961, deposits in banks up to Rs 1 lakh are guaranteed by the DICGC. This guarantee applies per depositor rather than per account. Hence holding Rs 5 lakh in five different accounts with the same bank will not raise your guarantee to Rs 5 lakh. It also applies to all types of accounts and not just fixed deposits or FDs. In return for this guarantee, your bank has to pay a premium to the DICGC. If the bank defaults in paying the premium for three consecutive years, the guarantee is withdrawn.
The Reserve Bank of India (RBI) regulates banks in terms of capital adequacy, corporate governance and lending norms. It sets a capital adequacy ratio (very roughly the capital they must set aside as a share of the loans they give out) guided by international standards such as Basel III. It also prescribes stringent conditions for the grant of bank licenses and for the continuance of these licenses. This provides a second layer of protection to your deposits.
Government ownership of banks gives you a third layer of protection. This protection is implicit rather than explicit. It is based on the principle that the government is unlikely to cause financial pain to depositors since most of them are also likely to be citizens and voters.
This does not automatically mean that private banks are unsafe. The stringent licensing conditions and regulation mean that only highly reputed private companies or groups enter the banking business.
These three elements – deposit guarantees, RBI regulation and government ownership – give you a high level of protection as a banking customer. This does not mean that banking defaults are non-existent. Customers of some co-operative banks have faced troubles in the past. There have also been instances of this internationally. Following the global financial crisis of 2008, depositors in Cyprus were forced to share in the losses of some of its banks.
The FRDI Bill
The Financial Resolution and Deposit Insurance (FRDI) Bill, 2017 seeks to set up a ‘Resolution Corporation’ for the protection of consumers and provide insurance for deposits in financial institutions. Under Section 52 of the Bill, the Resolution Corporation can subject depositors to a ‘bail-in.’ This means a portion of their money can be used to make up for the losses incurred by the bank. This can be done, for instance, by converting depositors’ money to shares in the bank to shore up the bank’s capital in the event of a crisis. These shares may subsequently lose value.
However, there are three good reasons why you shouldn’t worry:
- Such a bail-in will not affect insured deposits. This is currently up to Rs 1 lakh under the DICGC. The new insurance limit will be decided by the Resolution Corporation and is unlikely to be a lower amount.
- The Resolution Corporation itself will consist of persons appointed by the Central Government and representatives of other regulators such as SEBI, IRDA and PFRDA. Such a body is unlikely to make a recommendation that will harm the interests of a large body of depositors.
- The law stipulates that a bail-in cannot make depositors worse off than their position in the event of a liquidation.
In summary, the existing protections available to depositors of deposit insurance, RBI regulation and government ownership will continue. The first of these is likely to be increased by the Resolution Corporation. All this should reassure you as a depositor.
However, as an added measure, spend some time reading about the bank you are selecting to keep your funds. If there are signs of severe financial distress, you may want to avoid it. Such banks are also unlikely to deliver a high standard of service to you. In addition, be cautious while depositing your money in small banks including co-operative banks. Size is no guarantee of safety but it can be one of the factors in your decision.