Your deposits with Yes Bank could be insured for more than Rs 5 lakh: Here's why

How much of an investor's deposits with the bank are insured depends on how the deposits are held i.e. single deposit vs multiple deposits and the ownership pattern of the deposits. Insurance of bank deposits under DICGC rules depends on the owner...

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Account holders should know that deposits with Yes Bank are insured for up to Rs 5 lakh by the DICGC.
Customers of Yes Bank are a worried lot, and understandably so. Many companies have salary accounts of employees with the bank, many have savings accounts due to the bank's higher interest rates (6 per cent per annum) and there are fixed deposit and recurring deposit holders too. How much of an investor's deposits with the bank are insured depends on how the deposits are held i.e. single deposit vs multiple deposits and the ownership pattern of the deposits.

The good news is that depending on this, a person's deposits could be effectively insured for more than Rs 5 lakh. Insurance of bank deposits under the Deposit Insurance and Credit Guarantee Corporation (DICGC) rules depends on the ownership of deposits.

Account holders should know that deposits with Yes Bank are insured for up to Rs 5 lakh by the DICGC. DICGC insures all deposits such as savings, fixed, current, recurring, etc. except for a few such as inter-bank deposits, any amount due on account of and deposit received outside India, etc.


Here is a look at how DICGC insurance of deposits depends on mode of ownership of the deposit.

For instance, let us say Mr A has an individual salary account and fixed deposit in his name only with Yes Bank. Then both the accounts (i.e., salary account and fixed deposit) will be clubbed together and deposits will be insured for maximum of Rs 5 lakh.

Along with this, Mr A has deposits held jointly with his mother where he is a first account holder and his mother is the second holder. This account will be treated as a separate account from those accounts where he is sole owner e.g. his individual salary and fixed deposit account. The deposits in the joint account and his individual accounts will be insured separately under the DICGC rules for a maximum of Rs 5 lakh.

Let us assume, Mr A has a third savings account, again jointly held with his mother, where his mother is the first holder and Mr A is the second account holder. Then in such a scenario, this account will also be treated as a separate entity, i.e., it will be insured separately under DICGC rules.

deposit-coverage
*Deposits held with a bank are insured for maximum of Rs 5 lakh which is inclusive of savings account, fixed deposits and other deposits covered under the DICGC rules held in the same capacity and same right. Source: ET Online; RBI website, DICGC rules.

From the table above it can be seen that since Mr A's salary account and his FD is operated solely by him, they will be clubbed together and will be fully covered up to a maximum of Rs 5 lakh. In this case the total is Rs 2,75,000 which is fully insured as it is below Rs 5 lakh.

Further, both the joint accounts held by Mr A and his mother will be treated separately. This is because the order in which these accounts are held is different. In the point 3 in table above, the account is jointly held by Mr A and his mother where Mr A is the first account holder and his mother is the second account holder. Here, the accounts will be insured for a maximum of Rs 5 lakh even though the total deposits held in the savings account and fixed deposits exceed Rs 5 lakh.

Remember the DICGC insures principal and interest up to a maximum amount of Rs. five lakh. If the principal is Rs 5 lakh, then interest will not be covered.
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In point 4 in the table above, the joint account is held in a way where Mr A's mother is the first account holder and Mr A is the second account holder. Here the total insurance coverage on the deposit is Rs 5 lakh.

Thus Mr A's money with the bank is insured up to Rs 7.75 lakh (sum of 1, 2, and 3 in table above) even though he is the first holder in all these accounts.
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The deposit at 4 in the table is considered as owned by Mr A's mother because she is first holder. Therefore, this deposit will separately be insured up to Rs 5 lakh.

Investing in perpetual bonds? Be ready for these risks
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DHLF, PMC, Yes bank, new names of stressed financial institutions have been coming up and the situations seems to be have become more alarming. Among the many hit by the recent Yes bank crisis, features a section of retail investors who had invested in perpetual bonds issued by Yes Bank and are now facing the possibility of a complete wipe-out of their investments.

While the government has assured depositors that they will not be penalised, select Yes Bank perpetual bondholders would not receive their money back, according to the RBI’s draft restructuring proposal for Yes Bank. The final plan is still awaited but if there is a write-off, investors in debt schemes of mutual funds, which bought these bonds, will also face losses due to fall in NAVs of their units.

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Additional Tier 1 (AT1) bonds are issued to raise Additional Tier 1 capital, as per the Basel III norms, they ensure that a financial insitution's capital requirements are met. Perpetual bonds are seen as riskier quasi-debt instruments which do not have fixed maturity. Issuers pay coupons on these forever. The price of a such a bond is the coupon amount divided by a constant discount rate. Since they have no maturity date, investors can get their investment back only by selling them in the secondary debt market unless the issuer calls the bonds back, i.e. redeems them. When the issuer sinks, like Yes Bank did, it is unlikely to redeem the bonds on its own and for investors, finding buyers becomes near impossible.

Last year, there was a huge inflow of perpetual bonds into the market by banks, NBFCs. With liquidity being an issue and the NBFC crisis spooking investors, entities were forced to announce higher coupon rates. Consequently, the yield being offered was much higher than fixed deposit rates which lured some retail investors who were unaware of the risks. To make sure you don't fall prey to such an occurrence in the future, know about these risks associated with perpetual bonds.

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Though the bonds are issued by large corporates, investors should understand the implications of the company going into liquidation, in which event, perpetual bonds are subordinate to senior bonds, say financial experts and to claim final receipt, their status is just above that of preference shares. This means that perpetual bond investors will be paid after all other claimants like depositors, other bond holders, etc are paid. Preference and equity shareholders will be the ones to be paid after that.

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Perpetual bonds are unlike regular bonds where interest has to be paid regardless of whether the issuer is running a profit or loss. If there are no free reserves to dip into, no interest payment will be made in case of loss in a year by the issuer, according to experts. Free reserves are created out of profits from previous years.

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Another restrictive feature is tier 1 perpetual bonds are non cumulative. What this means is that interest that does not get paid in a year due to the company incurring loss, does not build up. Therefore, bond holders are not eligible to get the same in later years even if the company makes a profit.

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Further, perpetual bonds normally come with a call option— the issuers have the right to call (redeem) these bonds early. This means these institutions will call (redeem) them back if interest rates fall from current levels but will not if interest rates rise. In other words, these bonds are perpetual only for the investor and not for the issuer. Yield calculation is also different. Experts say that due to the call option, investors should calculate yield to call (YTC) instead of yield to maturity (YTM).

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Unlike for other bonds that have a maturity date when the issuer returns the principal, for perpetual bonds, liquidity is critical because selling in the secondary market is the only option available. However, liquidity is low and the bid-ask spread is high.

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In addition to the above-mentioned broader risks, investors should note that there are company-specific risks too. They should first look at their own risk appetite, then consider only perpetual bonds issued by financially very sound and healthy institutions, after evaluating the risks associated with these bonds. Doing a detailed cash flow analysis is recommended. Also note that the yield available from high quality corporates is normally much lower compared to that from risky ones. For example, in October last year, the YTC of HDFC Bank perpetual bonds was only 8.27% whereas the YTC from Yes Bank was 18%.

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