Good news! If a bank fails, A/c holders to get up to 5 lakh as per DICGC insurance within 90 days

As a repercussion, I see redemption in liquid funds to increase in the short-term ahead because the liquid funds are yielding ~3% returns for over a year. People would prefer to park their excess funds in a high-interest paying bank savings account or FD, with a maximum of Rs 5 lakh in any one bank to mitigate the risks.

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yup good move by govt.
On moving liquid fund to bank account I have some concern though.

Banks are offering high interest on saving bank a/c as a promotion. And you never know when that will end. Personally I started a kotak a/c with similar thought process few years back when it was offering 7%. Now it has dropped below 4%. If I remember correctly i hardly got 7% for a year.

Taxation is another issue, especially if you are in highest bracket (assuming you are already earning more than 10K through saving bank)

So right now it looks good move but it can flip anytime.

Yes, I mentioned for short time period ahead, until liquid funds yield a net positive inflation-adjusted return i.e >6%.

IDFC was the longest who offered rate of 7% for more than two years. Now they have reduced the rates. Currently we have RBL offering teired rates of 5.75% and Equitas small saving bank which is offering 7%.

There will always be one bank who is need of money and will offer higher rate. When one bank reduces, you move to the another

If I am thinking right, once the economic conditions stabilize a bit and the bad loans of the banks are settled, this ruling would also trigger a healthy competition amongst the banks to pay higher interest up to 5 lakh deposits. Now that the customer is aware that up to 5 lakh balance is insured. And if anything goes wrong, they will get their monies up to 5 lakh in 90 days. So they won’t keep more than 5 lakh in one bank and that too in a bank which is paying more interest for deposits up to 5 lakh. Banks would try to compete amongst themselves to lure the customers to open accounts with them to increase their CASA.

In short, customers will get the benefit.

With 5 lakh lying in more than one bank account, I would be more worried about cybercrime than about bank failing.
Your phone might be hacked, otp leaked, debit card cloned and you will loose all 5 lakhs in single shot.

With cyber crimes increasing, I genuinely come to believe keeping money idle beyond a limited amount in saving bank account is not a good idea, regardless of interest you are getting. Leaving 5lakhs in multiple bank account and then moving them to new accounts every time a new bank offers higher interest would be a nightmare scenario.

But I agree its a personal choice.