All You Need to Know About Deposit Insurance for Fixed Deposit

01 June 2023
4 min read
All You Need to Know About Deposit Insurance for Fixed Deposit
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Picture this: you've diligently saved your money in a fixed deposit, counting on it for future goals. However, some unforeseen risks come knocking on your bank's door. What do you do in such a situation?

That's where deposit insurance steps in to safeguard your money.

In this blog, we will explore the concept of deposit insurance for fixed deposits and understand how it safeguards your funds.

Understanding Fixed Deposit Insurance

Fixed deposits (FDs) are a trusted savings option, offering stability and a guaranteed interest rate. In case your bank defaults, you can be insured against losing all your money.

Deposit insurance is a system that protects your deposits in case of bank failures or defaults. All banks in India, including nationalized and private banks, are covered under deposit insurance.

Unlike other insurance products where you need to purchase separate policies for different assets, deposit insurance covers your deposits across all banks in India.

The Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the Reserve Bank of India (RBI), provides insurance coverage for deposits up to Rs 5 lakh. This coverage extends to various types of accounts, including fixed deposits, savings accounts, current accounts, and recurring deposits.

Deposit insurance promotes financial inclusion by encouraging individuals to participate in the formal banking system. Knowing that their deposits are protected, people from all walks of life, including those from economically disadvantaged backgrounds, can have access to secure and reliable banking services.

How Does Deposit Insurance Work?

In the event of a bank's failure or bankruptcy, the DICGC ensures that your deposits, including both principal and interest amounts, are protected up to the maximum insurance limit.

For example, if your principal amount is Rs 4,95,000 and accrued interest is Rs 4,000, the total insured amount would be Rs 4,99,000. However, amounts exceeding the insurance limit are not covered. This amount will also exclude any dues the depositor may have. 

DICGC Rules for FD Insurance 

The DICGC provides coverage for deposits across all banks in India. However, if the principal amount alone exceeds Rs. 5 lakhs, the accrued interest will not be insured.

The deposit insurance is determined by adding together the funds in the same type of ownership (single or joint account) at the same bank. If funds are in different types of ownership, they would be separately insured. 

For example, if an individual has an FD of 5 lakhs with their spouse, an FD of 5 lakhs as a sole proprietor, as well as an FD of 5 lakhs with their child, they will be insured for each of these separately and receive a total of 15 lakhs as insurance coverage. However, if they have an individual account as well as a sole proprietorship account at the same bank, the funds from both of these accounts would be added and then insured accordingly; if the amount exceeds 5 lakhs, they will only be given coverage worth 5 lakhs.

DICGC is liable to pay the deposit insurance within two months after receiving the claim list from the liquidator, even in the case of bank amalgamation or merger. It then transfers the money to the liquidator, who is responsible for paying the depositors.

In the case of bank amalgamation/merger, the amount is transferred to the transferee bank.

Benefits of Deposit Insurance

Here are some notable benefits that deposit insurance offers-

  • Financial Security and Stability

Deposit insurance provides you with a safety net by protecting your funds in the event of bank failures or defaults, ensuring financial security and stability.

Owing to the fact that it is backed by the government, you can be guaranteed with security against your deposits.

  • Broad Protection

Whether you’re a sole proprietor, trustee, foreign investor or any other entity/ individual, you are guaranteed to be insured with deposit insurance.

This inclusive approach ensures that no matter what type of depositor you are, you are equally protected under the deposit insurance scheme.

You may also want to know How to Invest in Fixed Deposit(FD) Online

  • Mitigates Systemic Risks

Deposit insurance helps mitigate systemic risks by providing a fallback that reduces the likelihood of bank runs and panics, thereby maintaining the overall stability of the banking sector.

  • Protects Different Types of Financial Goals

Bank deposit insurance protects different types of goals - home ownership, retirement savings, emergency funds, small business capital, education savings etc. 

Conclusion

Deposit insurance is a crucial safeguard for fixed deposit investors. It protects their deposits from potential risks associated with bank failures and defaults.

By understanding the coverage provided by the DICGC and the rules governing deposit insurance, investors can make informed decisions and have greater confidence in the safety of their fixed deposits.

While the current insurance limit is seen as low by some experts, the RBI has implemented measures to enhance the stability of banks and safeguard depositors' funds.

Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.

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