Fixed deposits are often considered a savings instrument option for many. Investors deposit a lump sum amount into an FD account, and they get a fixed rate of interest for the duration of the investment.

Bank FDs are considered to be among the safest forms of investment options when it comes to the safety of your capital, but banks are exposed to multiple risks. This could put your FDs too at risk. This is where deposit insurance steps in. 

Let’s understand the bank related risks that may have an impact on your fixed deposits and how deposit insurance comes in handy.

Default Risk

Although nationalized banks are traditionally considered to be safer than private banks, some banks from both segments in recent years have made the news. This is for its asset quality and violating PCA (prompt corrective action) norms. And most public sector banks are yet to ramp up their digital services to depositors. This is basically if the loans lent doesn’t pay up for the banks. 

Ultimately, such issues tarnish the brand name and result in low deposits and as such leads to a slowdown in performance. If the bank doesn’t deliver steady financial performance, it puts the corpus of multiple depositors’ at risk. 

The same incident could happen with a private bank as well despite all the positives of digital services, brand recognition and so on. If private banks’ financial performance or indicators are not up to the market or raises concerns of default, depositors money is still at risk. 

But don’t worry. This is where insurance steps in.

Deposit Insurance Cover – Your Money is Totally Safe

Your money is most likely safe if you have a fixed deposit in a bank. Not just fixed deposits, savings, current, recurring etc are also covered. As per the Reserve Bank of India (RBI), all banks are covered under deposit insurance. This means, your deposits at the bank are insured up to Rs 5 lakh only, secured by Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly-owned subsidiary of the RBI. 

It covers both principal and interest amounts up to the maximum limit. So, even if your bank defaults or files for bankruptcy your money is secured up to this limit. For instance, if you have a principal amount of 4,95,000 plus accrued interest of 4,000, the total amount insured by the DICGC would be 4,99,000. If, however, the principal amount in that account is Rs 5 lakh, the accrued interest will not be insured. Not because it was interesting but because that the amount exceeds the maximum insurance limit. 

While deposit insurance is good, many experts feel the cover of Rs 5 lakh is still very low (it was Rs 1 lakh earlier and the limit was increased in the FY21 budget).  Even if you were to take the DICGC insurance into account, amounts greater than Rs 5 lakh are potentially at risk. 

However, RBI has tweaked various norms to ensure banks from failing and also to keep the depositors’ money safe.

FAQs on fixed deposit insurance 

Can I increase my deposit insurance by depositing funds into different accounts at the same bank?

Not if they are in the same type of ownership (single or joint account) at the same bank. The funds are added together before deposit insurance is determined. However, if the funds are in different types of ownership, they would be separately insured.

If I have accounts in different banks, will those deposits be separately insured?

Yes. If you have deposits with more than one bank, the deposit insurance limit is applied to each bank separately.

If I have some dues payable, can the bank deduct the amount of dues from the deposit insurance?

Yes. Banks have the right to set off their dues from the amount of deposits as on cut off date. The deposit insurance is available after deducting such dues.

Who is liable to pay the cost of deposit insurance?

The deposit insurance premium is borne entirely by the insured bank.

When is DICGC liable to pay?

DICGC is liable to pay within two months after receiving the claim list from the liquidator. This is applicable even in the case of amalgamation or merger of banks. 

To whom does the DICGC transfer the money?

The DICGC pays the money to the liquidator who is liable to pay the depositors. In the case of amalgamation/merger of banks, the amount is paid to the transferee bank.