Rs 5 lakh rule! FD safety myth busted: Bigger bank doesn't mean safer money

Whether your FD is with a large, well-known bank or a small finance bank, the insurance cover is the same: Rs 5 lakh.

For many Indians, fixed deposits (FDs) are the ultimate symbol of safety. Most people instinctively choose large, familiar banks because they feel more secure. But in reality, FD safety has less to do with the bank’s brand and more to do with deposit insurance rules — something many investors overlook.

 

The key protection for depositors comes from the Deposit Insurance and Credit Guarantee Corporation (DICGC), which insures up to ₹5 lakh per depositor per bank, including interest. This insurance applies equally to large commercial banks and small finance banks.

 

According to Value Research, the real risk is not choosing a smaller bank — it’s keeping too much money in one bank.

 

For example, if you invest ₹7 lakh in a single bank FD and something goes wrong with the bank, only ₹5 lakh is insured. The remaining amount could be delayed or at risk.

 

"Why? If a bank is placed under regulatory moratorium, withdrawals may be temporarily restricted. Interest may stop accruing during that period, and depositors may have to wait for DICGC settlement. While recent regulatory changes have shortened payout timelines, delays are still possible," said Value Research in a note.

 

Value Research explains that a smarter approach is to split deposits across multiple banks, keeping each deposit within the insurance limit. This simple strategy protects your entire FD portfolio without reducing safety.

 

Why smaller banks sometimes offer better returns

 

Small finance banks often provide slightly higher FD interest rates — typically about 0.2–0.7 percentage points more than large banks — because they need to attract deposits and expand their customer base. Latest data compiled by Paisabazaar shows that small finance banks continue to offer the most attractive returns, with interest rates nearing 7.5%–7.9% for one- to five-year deposits in many cases.

 

These higher rates are largely because smaller banks compete aggressively for deposits to fund lending growth. For investors willing to diversify deposits across institutions, these banks can offer meaningful yield advantages over traditional options.

 

They are still regulated by the RBI and covered by the same deposit insurance system, which means the higher rate does not automatically imply higher risk.

 

Over time, even a small difference in rates can matter. For example, a three-year deposit of ₹4 lakh earning 7.2% instead of 6.5% could generate roughly ₹9,600 more at maturity. 

When repeated across multiple deposits, the difference can become meaningful.

 

A comparison of FD rates across different time periods for small versus established banks ( Value Research) 

Value Research Data based on average interest rates of eight prominent banks from each category as of February 2026. Based on best estimates, taking average interest rates in the respective tenure bands, with the <1 year band having average rates of

   

"Since the DICGC insures your fixed deposits only up to Rs 5 lakh, spreading the money across both large and small finance banks within this limit seems prudent. Not only can you safeguard your investments, but you can also earn better returns," said Value Research in a note. 

Safety is also about liquidity

 

Another important takeaway is that FDs are not ideal for emergency funds. If a bank faces restrictions, access to deposits could be temporarily limited.

 

For short-term needs, instruments like liquid or ultra-short-duration funds may provide faster access to money while still offering relatively stable returns.

 

The lesson is simple: FD safety comes from diversification, not familiarity. By spreading deposits across banks and keeping each deposit within the insurance limit, investors can improve both safety and returns.