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Should You Spread Your Money Across Multiple Bank Accounts For Safety, Liquidity?

Outlook Money

Should You Spread Your Money Across Multiple Bank Accounts For Safety, Liquidity?

With the Reserve Bank of India recently cancelling the licenses of several co-operative banks, it is important to understand how and whether we should park our funds across one or several banks for both liquidity as well as safety

RBI recently cancelled the licenses of some cooperative banks, and that has spooked a lot of customers over the safety of their money. 

The Reserve Bank of India (RBI) recently cancelled the licenses of some cooperative banks, and that has spooked a lot of customers over the safety of their money. 

So, should you spread your money across different bank account for additional safety, and if that is so, how much money would be insured per person?

The Union Cabinet amended the Deposit Insurance and Credit Guarantee Corporation (DICGC) Bill in 2021, wherein it allowed customers of failed or stressed banks to get their money back within 90 days of start of the moratorium. 

The 90-day period is divided in two periods of 45 days. With this amendment, depositors can withdraw funds up to Rs 5 lakh, even if the bank is currently under stress. The deposit insurance coverage applies to banks that would be put under moratorium in future, as well as those already under moratorium.

Where Does The Safety Net End?

Since all scheduled banks are covered under DICGC, whether it’s a private, public sector or a co-operative bank, all banks are equally safe for amounts of up to Rs. 5 lakh. This includes both the principal as well the interest held with the bank. 

But there’s a catch. 

Says Shweta Jain, financial planner, and CEO and founder of Investography: “For people who think just diversifying banks will protect them, do know that your total fixed deposits of up to Rs. 5 lakh are protected under DICGC. Even if one has Rs. 5 lakh in three different banks, only Rs. 5 lakh will be insured.”

Adds Rajan Sarkar, director and unit head, Anand Rathi Wealth, a private wealth management: “Customers of failed or stressed banks that are placed under moratorium, or customers with accounts in different banks will be able to get their deposits up to Rs 5 lakh back under the deposit insurance scheme of the Deposit Insurance and Credit Guarantee Corporation (DICGC),” 

Should You Diversify?

It is important to understand that fixed deposits (FDs) are a good way to hold emergency funds, and savings bank accounts are the de facto option to maintain liquidity. 

Jain advises spreading deposits across three-four banks, including private banks as well.

“The ideal scenario is multiple banks, with a mix of private and public banks. Say, SBI, ICICI Bank or HDFC Bank. I won’t recommend co-operative banks, as we have seen liquidity issues in many banks over the last decade. Both things are important – one is that the money should be safe, and second, that money should be accessible when needed. So, a combination is good,” says Jain.

Adds Sarkar: “They (private banks) provide ease of service, Netbanking, as well as mobile banking. If not private banks, the reach of public-sector banks is also significant now. Instead of banking with co-operative banks, people should bank with public banks. They are also professionally managed now, have qualified resources, as well as corporate 
 

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