Why deposit insurance of five lakhs is not enough to protect investors

Investor deposits are now protected up to Rs. five lakh person. This, however, does not mean your money is safe! Why a lot more has to be done to protect investor interests

Published: February 6, 2020 at 12:55 pm

Last Updated on February 6, 2020 at 1:11 pm

The finance minister announced a long-awaited increase in the insurance coverage of bank deposits from Rs. one lakh to five lakhs in budget 2020. While this is a welcome move, we argue that it is not enough to protect investor interests.

This budget announcement was formalised by an RBI circular on 4th Feb 2020. The Deposit Insurance and Credit Guarantee Corporation (DICGC) has now increased the insurance to Rs. five lakhs per depositor. To understand more about the term and conditions of this insurance, please consult our earlier article: What happens if my bank fails? All about Deposit insurance (DICGC) As a result, the DGIC has increase deposit insurance premium from 10 paise per Rs. 100 per year to 12 paise per Rs. 100 per year.

The finance minister said, “I wish to inform this august House that robust mechanism is in place to monitor the health of all Scheduled Commercial Banks and that
depositors’ money is safe”.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

While this may seem to assuage/reassure, we must take stock of the grim reality. Banking failures are a lot more common than we think! According to livemint (written after the PNB Nirav Modi scam), “Between 1935 and 1947, nearly 900 banks failed followed by 665 banks in the period from 1947 to nationalisation in 1969″. As always, regulation follows a scam.

Between July 26th 2019 and Feb 5 2020, one can find as many as 17 RBI press releases related to “Directions under Section 35 A of the Banking Regulation Act”. That is a restriction and/or ceiling on withdrawal/acceptance of deposits.

This means the bank is trouble (typically due to a scam or fraud) but has technically not yet failed! This means the deposit insurance does not come into play as yet! Even if the bank does actually fail, it would be foolish to expect or assume that the Rs. 5 lakh would be paid out immediately.

You can check the DICGC Claim Submission Pending page to understand different circumstances under which payment could be delayed. A simple appeal by the bank can drag on for months to years.

As it turns out, investors are too easy to please. They do not care if their EPF interest is delayed (and therefore returns lowered). “As long as it comes, I am okay” is the popular attitude. When a debt fund portfolio gets segregated, they tell themselves, “this means if the money is paid, I will get it back”. And in the case of deposits, many assume, “I will at least get back Rs. five lakh at some point”.

Deposit insurance is only symptomatic treatment. It does not address the cause. It is not a cure. The union cabinet has yesterday increased RBI’s role in the administration of cooperative banks. The Banking Regulation Act has been amended to allow audits as per RBI guidelines while Registrar of Cooperative Societies will still handle day-to-day administration.

While this is no doubt another step in the right direction, it should be kept in mind RBI inspection reports on even state-owned Indian Bank and SBI showed a disparity in reporting bad loans (aka “divergence”).

Thus allowing RBI to audit cooperative banks may not immediately avert a crisis such as this: PMC Bank Fraud: Lessons from Sanjay Gulati’s story. While lending is the lynchpin of the economy, can it ever be done responsibly with shareholders breathing down the necks of the bank management and while it remains so easy to cook the books, misrepresent financial health or even commit fraud? Mis-selling by a relationship manager pales in comparison: How & why bank relationship managers destroy your wealth by mis-selling! Stay away from them!

Investors would do well not to consider bank deposits as “safe” and diversify risks. Even if it is hard to transact with a post office, it is good to remind ourselves from time to time that they come with a 100% sovereign guarantee.

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)