You must have seen the news recently about the Punjab and Maharashtra Cooperative (PMC) Bank, with withdrawals being capped. There have been similar incidents in the past regarding different banks. A lot of rumours floating around during these times, which may not always be correct. A lot of investors are naturally worried about their deposits.
Is your bank deposit really safe?
Presently, only a deposit up to Rs 1 lakh (including interest) is protected under the Deposit Insurance and Credit Guarantee Corporation Act. What it means is that irrespective of the amount you have invested, only Rs 1 lakh is insured. The implication of this is that you would lose the differential in case your bank declares bankruptcy. For example, say you had Rs 5 lakh deposit with a particular bank which declares bankruptcy, you can get a maximum of Rs 1 lakh and you have to forego the rest. This amount is in no way sufficient considering the level of inflation over the past few years. Also, keep in mind that cooperative credit societies do not carry the same guarantee.
So, the question of what to do next comes in the mind of investors.
1) Firstly, don’t panic, because this doesn’t necessarily mean that the bank will be declaring bankruptcy. The bank could have other assets. Wait and watch, with care. Generally, it so happens that the government will bail out the bank.
2) Considering the news which keeps coming in every now and then about banks and other organisations defaulting on their loans and payments, it is advisable to split your fixed deposits across different banks, which is a good practice even otherwise. It is advisable to not put all your eggs in one basket. This will help to mitigate risk in case any of those banks face financial challenges.
3) Whenever you invest, make sure that you invest after due research, which at times becomes difficult because such fraud cases are difficult to identify. With due diligence, ensure that you do not become a victim of any banking fraud and are dealing with an RBI-regulated entity.
4) After investing, make sure you keep an eye on the financial health of your bank so that in case of any potential problems, you can withdraw your money safely, in time. Practically, this may not always work. As said above, invest with due diligence and diversify.
5) Fixed deposits in India are one of the most loved investment products for ages. With time, people have started moving towards equity investments, but it's still a work in progress. More often than not, a lot of people end up investing in fixed deposits due to their fear or lack of awareness about equity investments, and to seek safety in their investments. But this decision should be decided only on the basis of comprehensive financial planning, asset allocation, and risk profiling. Once that is done, it would be easy for you to invest in other asset classes like the stock market or mutual funds to generate better risk-adjusted returns. So, the focus should be on doing your financial planning and creating a good asset allocation.
6) One more important factor to consider here is the element of taxation. When it comes to taxes, fixed deposits are taxed according to your Income Tax slab rate. You can save more money by investing in other products like PF/PPF or equity investments which might not need you to pay a higher tax rate.
As a customer, refrain from investing in banks (especially large amounts deposited in cooperative banks) which offer high-interest rates on their deposits and also provide a relaxed account opening process.
Rishabh Parakh is a personal finance strategist
and Chief Gardener of Money Plant Consultancy, an established firm providing tax and wealth management services across Maharashtra, Singapore and the UK.