Why in news?

The government is considering raising bank deposit insurance beyond the current ₹5 lakh. The bank deposit insurance is provided by RBI's Deposit Insurance and Credit Guarantee Corporation (DICGC).

What’s in today’s article?

• Bank Deposit Insurance
• Government's Stand on Deposit Insurance
• DICGC’s Coverage Limit: Key Points
• Evolution of Depositor’s Insurance Ceiling
• The Case for Increasing Deposit Insurance Further

Bank Deposit Insurance

• It protects depositors from losing money if a bank fails. It is a key part of a financial safety net that helps stabilize the financial system.
• Working
  • Depositors can access insured funds immediately.
  • Prevents panic in the financial system.
  • Shields depositors from liquidation risks.
• Coverage
  • In India, the Deposit Insurance and Credit Guarantee Corporation (DICGC) insures deposits up to ₹5 lakh.
• Covered Banks
  • Commercial banks, foreign banks, local area banks, regional rural banks, and co-operative banks (excluding primary co-operative societies).
• Covered Deposits
  • Savings, fixed, current, and recurring deposits.
• Not Covered
  • Government and inter-bank deposits.
• Premium
  • Paid by banks, collected based on risk profile.
• Benefits of Deposit Insurance
  • Protects small depositors from financial loss.
  • Stabilizes the financial system.
  • Prevents widespread panic during banking crises.

Government's Stand on Deposit Insurance

• The government is actively considering increasing deposit insurance. A final decision will be notified once approved.
• This was replied by the govt officials when asked about what the government was doing in the matter of the New India Co-operative Bank.
• RBI’s Actions on New India Co-operative Bank
  • RBI superseded the Board for 12 months due to poor governance.
  • Restrictions imposed: No new loans, investments, liabilities, or payments without RBI approval.
  • Effective from: February 13, 2025, for six months.
  • The bank has 30 branches and reported losses in recent years.

DICGC’s Coverage Limit: Key Points

• Section 18A of the DICGC Act, 1961 (inserted in 2021) ensures depositors receive interim payments in case the RBI imposes restrictions on a bank.
• Depositors can access their insured deposits up to Rs 5 lakh within 90 days of such restrictions.
• Insurance Coverage on Bank Deposits
  • Maximum Coverage: Rs 5 lakh (including principal + interest).
  • Example 1: If a depositor holds Rs 4,99,800 (Rs 4,90,000 principal + Rs 9,800 interest), the entire amount is covered.
  • Example 2: If a depositor holds Rs 5,10,000 (Rs 5,00,000 principal + Rs 10,000 interest), only Rs 5 lakh is covered—interest beyond Rs 5 lakh is not insured.
• Payment in Case of Bank Liquidation
  • If a bank is liquidated, DICGC pays the insured amount (up to Rs 5 lakh per depositor) to the liquidator within two months of receiving the claim list.
  • The liquidator then distributes the claim amount to depositors.

Evolution of Depositor’s Insurance Ceiling

• Initially introduced in 1962 with a coverage of Rs 1,500 per depositor.
• Enhanced six times over the years, reaching Rs 1 lakh before 2020.
• Raised to Rs 5 lakh on February 4, 2020, after RBI's action against Punjab and Maharashtra Co-operative Bank Ltd.
• Growth of Insured Banks
  • Started with 287 banks in 1962.
  • Increased to 1,997 insured banks as of March 31, 2024.

The Case for Increasing Deposit Insurance Further

• As of March 31, 2024, 97.8% of total accounts were fully insured, exceeding the international benchmark of 80%.
• RBI Deputy Governor M Rajeshwar Rao highlighted that India’s growing and formalising economy will lead to a rise in both primary and secondary deposits.
• A higher deposit insurance cover would:
  • Provide better protection to depositors in case of bank failures (e.g., New India Co-operative Bank).
  • Strengthen trust and confidence in the banking system.