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Deposit Insurance May Rise To Rs 15 Lakhs

IndianMoney.com Research Team | Updated On Friday, March 09,2018, 11:29 AM
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Deposit Insurance May Rise To Rs 15 Lakhs

 

The Financial Resolution and Deposit Insurance popularly called FRDI, has been a topic of hot debate. Rumors had spread that under the FRDI Bill, your money would be used to bail-out banks, reeling under the weight of Non-Performing Assets (NPAs).

What got you and other citizens worried was the bail-in clause in the FRDI Bill. The FRDI Bill aims to limit the damage to the economy caused by the failure of banks, insurers, NBFCs, Pension Funds and Stock Exchanges. Under the bail-in clause, you (depositor) will have to bear part of the cost, to rescue a major financial institution on the brink of failure.

Now to the big question. Will your and other citizens deposits in banks be used, for the bail-in of Too Big To Fail banks and major financial Institutions? Do you have cause for worry?

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Deposit Insurance May Rise To Rs 15 Lakhs

 

Let's get an idea on the FRDI Bill. The Financial Resolution and Deposit Insurance Bill aims to set up a Resolution Corporation (RC), to replace the existing Deposit Insurance and Credit Guarantee Corporation. The RC will monitor banks, insurers, NBFCs and other major financial institutions and categorize them based on risk profiles like low, moderate, material, imminent and critical.

It will anticipate the risk of failure of major financial institutions (What are the chances of these financial institutions failing) and will take corrective action to resolve the problem in case of failure. The Resolution Corporation is also tasked with providing deposit insurance up to a particular limit, which has not yet been specified.

 

1. What is Deposit Insurance?

 

You deposit money in banks only because you are confident that banks will return your money with interest as promised. Your source of confidence is the Deposit Insurance Corporation and Credit Guarantee Corporation (DICGC), which guarantees your deposits in banks up to a maximum of Rs 1 Lakh for both Principal and Interest, in all branches of a bank.

This amount of Rs 1 Lakh was set, way back in 1993.

The Resolution Corporation set up under the FRDI, will replace the DICGC.

 

SEE ALSO: FRDI 2017: Arun Jaitley Says Public Deposits Will Be Protected

 

2. Is your money in banks safe?

 

The bail-in clause under FRDI, was a worry not just for you, but also for rich cricketers and HNIs. Rumors were spread on social media saying, your money would be snatched to save banks loaded with NPAs. Wealthy Indians rushed to money managers to check if their bank deposits were under risk.

So do you need to be worried? Even with deposit insurance, there was no guarantee on the amounts beyond Rs 1 Lakh. The FRDI Bill brings clarity on what happens to your deposits in banks. Do you think a guarantee of just Rs 1 Lakh set way back in 1993, is sufficient as deposit insurance? With rising inflation must not this amount be increased?

Still worried...read this....No Public Sector bank has failed since Independence. Even if a Private bank or Co-operative bank fails, RBI will merge them with larger banks. 

It would be political suicide for any Government which allows bank depositors to lose money to bank failures, even beyond the Rs 1 Lakh deposit insurance.

 

SEE ALSO: Are Your Deposits In Banks Safe?

 

3. Deposit Insurance May Rise To Rs 15 Lakhs

 

The Deposit Insurance of Rs 1 Lakh was set way back in 1993. At that time, this amount was more than sufficient to cover at least 90% of deposits. But as of March 2016, the deposit insurance of Rs 1 Lakh was sufficient to cover just 67% of deposits. To cover 90% of deposits, deposit insurance must be raised to Rs 15 Lakhs. Will the FRDI Bill set the deposit insurance at Rs 15 Lakhs?

For you to get the deposit insurance of Rs 1 Lakh, banks pay a premium of 10 paise for every Rs 100 insured. If the deposit insurance is raised to Rs 15 Lakhs, banks would have to pay a higher premium. Currently banks bear the premium charges, but they could try to pass on these charges to you.

Deposit Insurance must be hiked to at least Rs 15 Lakhs.

Your deposits in banks are very safe. You have no cause for worry. Be Wise, Get Rich.

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IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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