The New India Co-operative Bank (NICB) fraud has raised fresh concerns about safety of deposits in co-operative banks. Since the inception of deposit insurance in 1962, there have been as many as 430 co-operative bank failures, putting at risk thousands of crores of rupees of depositors.
These crises have led to a staggering deposit insurance payout of `16,000 crore till March 2024, against `296 crore towards claims of commercial banks. The biggest was `3,854 crore to 8,69,000 depositors of Punjab & Maharashtra Cooperative Bank in 2022.
For parking lifetime savings in banks, individuals should prioritise safety over high interest rates. They should diversify deposits across multiple banks to reduce risk and keep below `5 lakh per bank to ensure full coverage by Deposit Insurance and Credit Guarantee Corporation (DICGC), a Reserve Bank of India subsidiary.
Prioritise deposits
To protect savings, individuals should deposit in a mix of public sector banks, large private banks, and small finance banks (SFB). They should choose a large state-owned bank to park the maximum savings. A secondary bank account can be held with a top private sector bank. If for some reason, keeping some money in a co-operative bank is essential, it is better to keep it to the bare minimum. Though up to `5 lakh in a co-operative bank is insured by DICGC, in case of a bank failure one will have to go through financial difficulties till they get the DICGC payouts. “If one bank faces financial trouble, deposits in other banks remain secure. Reassess your bank choices periodically based on their financial performance,” says Adhil Shetty, CEO, Bankbazaar.com.
Spread across banks
DICGC insurance covers both interest and principal components of fixed deposits as well as that in savings accounts, recurring deposits and current account with each scheduled bank. The deposit cover kicks in on the liquidation of the bank or under RBI’s all-inclusive directions. The corporation is liable to pay claims to depositors within two months from the date of receipt of the list of claimants. To avoid delays, depositors must ensure account details and KYC documents are updated.
Gaurav Aggarwal, chief business officer, Unsecured Lending, Paisabazaar, says as many of the SFBs are still offering fixed deposit yields of 8% and above, depositors can distribute their deposits across multiple SFBs. “It should be done in such a way that their cumulative deposits with each of those banks do not exceed `5 lakh.”
What NICB customers should do now
NICB customers must update bank mandates to avoid missed payments. The paperwork for each payment instruction has to be done separately as each organisation has a different set of the relevant forms. Chaitali Dutta, founder, AZUKE Personal Finance Advisory, says for outstanding loans at the crisis-hit bank, borrowers will have to transfer the balances to another lender. For EMIs, they must inform the lenders and provide new bank details.
For systematic investment plans in mutual funds, they must log in to fund house websites and update the bank mandate. Utility bill auto-pay instructions should be shifted to another bank through the biller’s website or mobile app. Salary and pension recipients should update their account details with employers and Employees Provident Fund Organisation. They must ensure that sufficient funds are deposited in the new account to prevent transaction failures.