Deposit Insurance Cover: A Shield to Protect Your Savings

Why on the NEWS?

• The government is considering increasing the insurance cover from the current limit of Rs 5 lakh.

Key Points:

• The Deposit Insurance and Credit Guarantee Corporation (DICGC) is a special division of the Reserve Bank of India (RBI).
• This corporation provides an important layer of financial protection for bank depositors.

What is Deposit Insurance Cover?

• Deposit insurance cover is a protection scheme that protects depositors from losing their deposits in case of a bank failure. 
• This cover is provided by DICGC, which works under the Reserve Bank of India, and applies to all commercial banks, regional rural banks, local area banks, and co-operative banks. 
• However, primary co-operative societies are not insured by DICGC.
• Savings, term, current and recurring deposit accounts are insured by the DICGC, but insurance is not available for deposits by foreign, central and state governments and inter-bank deposits. 
• The premium for this insurance is paid by the bank, not the depositor.

New government proposal

• Financial Services Secretary M Nagaraju recently announced that the government is actively considering increasing the insurance cover of bank deposits to more than Rs 5 lakh. 
• The decision comes especially after the recent crisis of New India Co-operative Bank, where the Reserve Bank of India has removed the board of directors of the bank for 12 months due to supervisory concerns and "poor governance standards".
• The bank has 30 branches in Mumbai, Thane, Navi Mumbai, Pune and Surat and its deposit base was Rs 2,436 crore at the end of March 2024. 
• The bank has consistently posted losses, raising concerns among depositors.

Extent and procedure of deposit insurance

• The DICGC provides insurance cover of up to Rs 5 lakh per depositor, which includes both principal amount and interest. 
• If a depositor has deposits of Rs 4,99,800 in his account, the entire amount will be insured, but if the principal amount is Rs 5 lakh or more, the interest earned will not be included in the cover.
• As per Section 18A of the DICGC Act, 1961, in case of bank failure, eligible depositors of the bank are required to submit a claim list within 45 days. 
• The DICGC pays up to Rs 5 lakh to depositors within two months of receiving the claim list.

Historical evolution of deposit insurance coverage

• Deposit insurance in India was introduced in 1962, when the per depositor coverage was only Rs 1,500. 
• This limit has increased to Rs 5 lakh over time. 
• On February 4, 2020, this cover was increased from Rs 1 lakh to Rs 5 lakh following the Punjab and Maharashtra Co-operative Bank Ltd crisis.
• The Deposit Insurance Scheme was introduced in 1962 with 287 banks, the number of insured banks as on March 31, 2024 was 1,997.

The road ahead and challenges

• According to RBI Deputy Governor M Rajeswara Rao, fully protected accounts in India were 97.8% of the total by March 31, 2024, which is higher than the international benchmark of 80%. 
• However, he also cautioned that as India's economy grows and formalises, bank deposits will see a sharp increase.
• Increasing the limit of deposit insurance cover will better protect the interests of depositors, especially in cases like New India Co-operative Bank. 
• This will not only increase depositor confidence but also strengthen the stability of the banking system.

What is DICGC?

• The full form of DICGC is Deposit Insurance and Credit Guarantee Corporation. 
• It is a special division of the Reserve Bank of India (RBI), whose main objective is to provide depositors with the safety of their deposits in case the bank fails. 

Formation of DICGC:

• DICGC was established on 15 July 1978.
• It is a wholly-owned subsidiary of the Reserve Bank of India (RBI).

What does DICGC do?

• If a bank goes bankrupt or is closed by the RBI, DICGC guarantees an amount of up to Rs 5 lakh to each depositor.
• This guarantee applies to various bank accounts—such as 
• Savings account,
• Current account, 
• Fixed deposit and,
• Recurring deposit.
• The objective of DICGC is to secure the savings of small depositors, so that their deposits are not lost during a bank failure.

Insurance coverage:

• The maximum insurance cover per depositor per bank is Rs 5 lakh (this includes both principal and interest).
• This coverage applies uniformly across all branches of the bank.

Which banks does it apply to?

• All Commercial Banks.
• Regional Rural Banks (RRBs).
• Local Area Banks.
• Cooperative Banks.
• Foreign bank branches operating in India.

Which deposits are not covered by insurance?

• Deposits of foreign governments, central and state governments.
• Deposits of primary cooperative societies.
• Inter-bank deposits (deposits by one bank in another bank).