Personal Finance

4 ways to beat falling cover for deposits

| Updated on June 23, 2019 Published on June 23, 2019

With the insured amount capped at ₹1 lakh, here’s how you can increase their safety

A deposit is one of the most tested small-savings instrument for retail investors. It is risk-free, making it one of the safest financial products. Well, not quite. What happens if the bank where you have parked your deposit gets liquidated or folds up due to mismanagement?

In such cases, your deposit is insured by the Deposit Insurance and Credit Guarantee Corporation Act (DICGC). The good news is that you do not have to pay any premium to insure your deposit against such events. The bad news is that the insured amount is capped at ₹1 lakh.

Here are some ways to increase the safety of your deposits.

As per recent news reports, insurance coverage for deposits stood at a mere 30 per cent of all deposits, declining from over 60y per cent just ten years earlier.

This means, in recent years, more and more depositors have been opening deposits of value more than ₹1 lakh. This, in turn, means more and more of depositor money is exposed to inherent risk — the bank’s inability to return the deposit money during unforeseen events such as closure. Fortunately, there are a few smart ways to get around this.

Opt for a stable bank

Large stable banks are unlikely to get liquidated or topple over due to asset stress. They usually have stringent lending norms, as well as efficient top management. They have relatively lower non-performing assets (NPAs) — loans that have defaulted or are likely to default.

One way to assess the ability of a bank to repay your deposit is by looking at its net interest margin (NIM) — the difference between what it earned as interest income on loans and what it paid as interest to depositors.

This is expressed as a percentage of the average earning assets of, or loans given out by, the bank.

If the NIM is higher than the industry average or benchmark, the bank is in good financial health and is more likely to repay its depositors.

Spread your deposits

While parking your deposits in a large stable bank may protect your money, it’s still not foolproof. Large banks make large gambits in trying to increase their asset base or the pool of loans from which they can earn interest income. Consequently, they may expose their depositors to larger risks.

As a second level of protection, you can spread your deposits across family members or trusted contacts. For instance, instead of parking ₹3 lakh in a single deposit in your name, split it into three deposits of ₹1 lakh each in the names of your family members and in your name. However, be aware that this may add to the tax liability of your family members, based on their existing income levels.

Go for joint deposits

Even if you spread your deposits across multiple depositors, you may soon reach a practical limit. Remember, the insured limit of ₹1 lakh applies to each depositor, per bank.

So make use of joint deposits. You can change the order of the depositors in the joint deposit account, to optimise the deposit insurance cover.

Move to other products

Park your money in other financial products that have a comparable risk-return profile. Government Securities or G-Secs are a good option as they offer maximum safety. You can choose between very short term (cash management bills), short term (treasury bills), and long-term (government bonds) instruments. G-Secs can be resold in the secondary market or be used to get loans in the repo market. Land and gold are other comparable assets, but they are less riskier only over the longer run.

Plan your deposit strategy, be selective about where you deposit, and do not shy away from exploring other savings instruments — after all, it is your hard-earned money.

The writer is co-founder, & Managing Partner, Hubwords Media

Published on June 23, 2019
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