Is it SAFE to Save in BANK ?
BANKS ARE BROKEN
We believe that saving money is the foundation of wealth. But where can you save where your money can keep pace with inflation and be safe?
We all know that rates are at their rock bottom, but you may be blissfully unaware of all of the potential threats to your savings from theft, civil asset forfeiture, cyber-crimes, bank melt-downs and prying eyes.
We believe you would be wise to diversify savings as well as investments. We wrote this article to alert our clients to critical issues within the banking system: Is it SAFE to Save in BANK?
What about DICGC?
Deposit Insurance and Credit Guarantee Corporation (DICGC) is a wholly owned subsidiary of Reserve Bank of India. It was established on 15 July 1978 under the Deposit Insurance and Credit Guarantee Corporation Act, 1961 for the purpose of providing insurance of deposits and guaranteeing of credit facilities. DICGC insures all bank deposits, such as saving, fixed, current, recurring deposit for up to the limit of Rs. 100,000 of each deposits in a bank. Presently the banks have to pay a sum to the DICGC as insurance premium which insures all kinds of bank deposits up to a limit of ₹1,00,000. In case a stressed bank had to be liquidated, the depositors would be paid through DICGC.
Though the bill proposes the banks to pay a sum to the Resolution Corporation, it neither specifies the insured amount nor the amount a depositor would be paid. It is thus unclear how much a depositor would be paid in case of liquidation. After the recent crisis that hit the Punjab and Maharashtra Co-operative (PMC) Bank, there have been demands from various quarters that the deposit guarantee limit, which was last revised in 1993, be increased.
DICGC covers only 28% of the deposit amount by value; about 92% of depositor accounts are insured. Also, about 70% of total deposits by value in the Indian banking system are with public sector banks, which are perceived to be quasi-sovereign and government’s strong support will ensure safety of the deposits. RBI’s latest figures indicate that while all bank accounts are covered under DICGC, only 28% of the total number of bank deposits are covered under deposit insurance.
If you invested ₹1 lakh in a bank in 2008 for 10 years at the then prevailing rate of 7.75% per annum, the cumulative amount would be ₹2.10 lakh today. So the amount covered under deposit insurance in 2008 would not be covered now. Going by this example, the amount under coverage would have to be doubled every 10-12 years, even if interest rates drop to 6% per annum.
Many professionals have described that limit as a placebo. They believe the DICGC would actually be insolvent in the event of a major run on the banks. DICGC insurance may make us feel more secure, but it can only back up a small percentage of bank deposits before the house of cards would fall.
Then there’s the problem of crime, confiscation, creditors and lawsuits! It will probably never happen to you, but sometimes those who should be protecting us are the ones we need protection from.
So Where Can you save?
An excellent and little-known alternative for storing cash is where BANKS are keeping much of THEIR cash… in high cash value life insurance. Cash value life insurance is coverage that lasts your entire life, and has an investment component that builds cash value over time.
Each time you pay your insurance premium, your payment is split between your death benefit and your policy’s cash value. The money you pay toward the cash value goes into an investment account. Over time, those rupee will grow tax-deferred.
The DICGC insures all deposits such as savings, fixed, current, recurring, etc. deposits except the following types of deposits
- Deposits of foreign Governments;
- Deposits of Central/State Governments.
- Inter-bank deposits.
- Deposits of the State Land Development Banks with the State co-operative bank.
- Any amount due on account of and deposit received outside India.
- Any amount, which has been specifically exempted by the corporation with the previous approval of Reserve Bank of India
Each depositor in a bank is insured up-to a maximum of 1,00,000 (Rupees One Lakh) for both principal and interest amount held by him in the same right and same capacity as on the date of liquidation/cancellation of bank’s licence or the date on which the scheme of amalgamation/merger/reconstruction comes into force.
If a bank goes into liquidation, DICGC is liable to pay to the liquidator the claim amount of each depositor upto Rupees one lakh within two months from the date of receipt of claim list from the liquidator. The liquidator has to disburse the claim amount to each insured depositor corresponding to their claim amount.”
If a bank is reconstructed or amalgamated / merged with another bank: The DICGC pays the bank concerned, the difference between the full amount of deposit or the limit of insurance cover in force at the time, whichever is less and the amount received by him under the reconstruction / amalgamation scheme within two months from the date of receipt of claim list from the transferee bank / Chief Executive Officer of the insured bank/transferee bank as the case may be.”
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