How to save your FD investment from bank failures?

Fixed Deposits are considered to be safer for senior citizens. They offer assured returns, predictable income, and capital protection at least in theory. However, in recent years, cases of financial distress in certain banks have reminded investors that even FDs are not entirely risk-free.  In such situations, depositors may face delays or restrictions in accessing their funds.  Here is how to safeguard your FD investments against potential bank failures.

Diversify your FD investments

One of the simplest ways to protect your Fixed Deposit investment is to spread it across multiple banks rather than keeping a large sum in one bank. For example, instead of investing Rs. 15 lakh in one bank, invest Rs. 5 lakh each in three different banks. This ensures that each deposit is fully covered under the DICGC insurance limit. Diversification reduces your exposure to the financial health of any single bank.

Choose banks with decent ratings

Before opening an FD, research the bank’s credit ratings. Agencies like CRISIL, ICRA, and CARE assign ratings based on the bank’s ability to meet its obligations. Higher ratings (AAA) indicate higher safety. A higher Capital Adequacy Rating (CAR) means the bank is better equipped to absorb potential losses. Lower Non-Performing Asset (NPA) suggests healthier Loan books.

Be cautious about higher rates

While some co-operative banks offer attractive FD rates, they may also carry higher risk due to limited resources, smaller capital base, and governance challenges. If you choose such banks, keep deposits within the Rs. 5 lakh DICGC limit. Monitor RBI notifications for any regulatory actions against the bank.

Stay updated

The RBI regularly monitors banks and places financially weak ones under the Prompt Corrective Action framework. Banks under PCA face restrictions on lending, branch expansion, and dividend payouts, which signal that they are under stress. Check RBI press releases for updates. Follow credible financial news to detect early warning signs.

Ladder your FD tenures

FD laddering involves splitting your investment into multiple FDs with different maturity dates. You get regular access to funds, and you can also shift funds to another bank if you detect financial instability in your bank. For example, instead of locking Rs. 10 lakh for 5 years in one FD, you could place Rs. 2 lakh each in 1-year, 2-year, 3-year, 4-year, and 5-year deposits.

Avoid chasing high rates

If a bank offers FD rates far above the market average, it may indicate higher underlying risk. While higher rates are tempting, they should not be the sole factor in your decision. Always balance return vs. safety.

Review regularly

Financial conditions change. Review your FD portfolio at least once a year to check if any bank’s rating has changed, renew or shift deposits if needed and rebalance between higher FD interest rate options and safer alternatives.

Conclusion

While bank failures in India are rare, the possibility, though small, exists. The key to protecting your FD investments is to combine the tactics mentioned. Choosing strong banks, spreading your investments, and keeping an eye on warning signs can ensure that your hard-earned savings remain safe.