Are your bank deposits safe – now and after “bail-in clause”?

Posted by Namita Gad on 02 Jan, 2018

Are your bank deposits safe – now and after “bail-in clause”?

Bank deposits, either fixed or recurring, hold a piece in everyone’s portfolio because it is considered as the safest investment product by most of us. But are they really safe? What happens to your deposits when your bank is on its way to bankruptcy?

Current scenario on security of your bank deposits
Currently, Reserve Bank of India (RBI) protects up to Rs.1Lac of bank deposits under the Deposit Insurance and Credit Guarantee Corporation (DICGC) Act. That means if you are having bank deposits of Rs.20Lacs and your bank fails, then all you will get is just Rs.1Lac as an insurance claim. This limit of Rs.1Lac has remained constant over the past two decades despite of inflation and change in standard of living.

New Bill on the block - FRDI 2017
Financial Resolution and Deposit Insurance (FRDI) Bill, 2017 aims systematic resolution of all financial firms - banks, insurance companies and other financial intermediaries; wherein Resolution Corporation would be established to monitor financial firms, anticipate risk of failure, take corrective action and resolve them in such failure. At present, the Bill is pending with the standing committee and is scheduled for discussion in the Parliament this winter session. Though the objectives of this bill look favorable to the economy, the bill is surrounded by controversies due to its “bail-in” clause.

What is a bail-in clause?
A bail-in is a mode to rescue an ailing bank or a financial institution by making its creditors and depositors bear the loss directly. That means in case of bank failure, creditors and depositors will have to take a hit and forgo their money. Moreover, the bill does not specify the insurance limit for such deposits loss. The draft bill also empowers Resolution Corporation to cancel the liability of a failing bank or convert the nature of the liability.

Should you worry about your deposits?
There is no cause of worry presently as the bill is still pending enactment. With regards to the current insurance ceiling of Rs.1Lac on your deposits, the RBI has, in the past, forced merger of banks and taken other corrective measures to save depositors’ hard earned money in case of bank failure. But one should be prudent of such provisions of law being passed in the future while making an investment decision.