Takeway from Silicon Valley Bank episode

03/14/2023

Thinking about the Silicon Valley Bank episode, nobody and especially retail customers would ever want to get into similar situation. Though, the governing body has taken care of the situation, still the fear of missing on life’s saving is going to stay with most and people are going to create fail safes.

Coming to a more thoughtful question. Do Indians even need to bother about such a situation? I would say, yes. If this can happen to them, it can happen to us as well.

Currently RBI insures all the saving accounts for upto ₹5 lakhs. What this means is incase the bank declares bankruptcy, you will get upto ₹5 lakhs no matter how much your bank balance was over and above ₹5 lakhs. Eg. you have ₹25L, you get ₹5L. You have ₹4.5L, you get ₹4.5L. This is valid for saving accounts and fixed deposits.

How to find way around this?

1. Park money in different bank account. I do not like this idea, because imagine doing baseless transactions just keep the account active. Consider this to be the most easiest way. Multiple accounts means each account getting insured upto ₹5L.
2. Create multiple joint fixed deposits with multiple family members. Each one of them will be treated individually and maxed out at ₹5L. I would say keep the principle less than ₹5L and in such a way that your principle and interest equals to ₹5L. Making it the case, where you never lose a dime.
3. Buying short term debt fund. These funds match fixed deposit rates and are almost immune to market fluctuations. The underlying asset is mostly Sovereign bonds issued by Government of India or debentures issued by other companies. It is unlikely to happen that these things default. Good part is they are more likely to give you better returns than savings or fixed deposits. Some of them offer just over 7% in the 5 year window which is pretty good if you ask me. Savings and deposits max at around 6.5% annual return. I will do a separate post on how differently interest earned on deposits/savings & debt funds are taxed and how to make the most out of it.