Buildings have been crashing in Chennai in the sharp monsoon rains, damaging property and taking lives. When banks and financial institutions crash, the impact is as tragic and the ruin more widespread.
Three banks failed in the US in the last couple of months, First Republic Bank, Signature and Silicon Valley Bank. The latter, for example, shocked the start-up ecosystem since most, if not all, start-ups and venture capitalists and investors bank with it.
I talked to the promoters of a few start-ups and found those who slept peacefully even through the initial tremors were those who had deposits of $2,50,000 or less.
This is the limit of coverage under the Federal Deposit Insurance Corporation. One promoter even said his firm limited exposure to this ceiling in each bank.
Prudence did pay off for these start-ups, known basically for risk-taking! India also has an insurance scheme for bank deposits administered by the Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly-owned arm of the RBI. Each bank depositor is insured up to ₹5,00,000 of principal and interest in one right and capacity.
That is if you had ₹10 lakh and across SB accounts and FDs in ABC Bank, DICGC insurance covers up to ₹5 lakh. If you had, say, another ₹8 lakh in a joint account with your spouse as a second holder, the ₹5 lakh insurance would be available again. So, if that bank failed, you would be able to get ₹10 lakh through insurance.
- Also read: A DICGC cover is decent protection for the depositors’ funds if the bank shuts down for good
This would apply all over again in each bank you deal with should they fail. The deposit insurance scheme is compulsory for all commercial banks including branches of foreign banks functioning in India, local area banks and regional rural banks. All cooperative banks are also covered. The premium for this is borne entirely by the insured bank.
Spreading risks
Some of you may be old enough to remember the days when folks would have small FDs spread across different banks and branches to avoid triggering tax deductions at source on interest. That is the strategy to apply to safeguard your savings in bank deposits. Spread out the risk.
- Also read: Protecting banks against failures
India is a high household savings economy and with the expected surge in the retired population and their preferred savings avenue being safe fixed-income bank deposits, there is a case for way higher DICGC insurance.
Maybe it can be made available for extra premium for those who have the requirement rather than for all depositors.
(The writer is a business journalist specialising in insurance & corporate history)