RBI to Raise Deposit Insurance Cover

Syllabus: GS3/Economy

Context

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

About

• Deposit insurance was introduced in India in 1962, and coverage has thus far been enhanced six times – from Rs 1,500 per depositor to Rs 5 lakh now.
• The deposit insurance scheme was started with 287 banks in 1962; the number of insured banks was 1,997 as of March 31, 2024.

What is Deposit Insurance Cover? 

• The Deposit Insurance and Credit Guarantee Corporation (DICGC) is a subsidiary of the Reserve Bank of India (RBI).
  • It insures deposits held in Indian banks, providing protection in the event of a bank failure.
• Cover: DICGC currently offers insurance coverage of up to ₹5 lakh per depositor, per bank.
  • This includes the total of both principal and interest amounts in all types of accounts, such as savings, fixed, current, and recurring deposits.
• DICGC covers deposits in various types of banks, including: Commercial Banks (public, private, and foreign banks), Cooperative Banks (central, state, and urban co-operatives)  and Regional Rural Banks (RRBs).
• How does it work: 
  • Registration: Banks must register with DICGC to offer deposit insurance.
  • Premium Payment: Banks pay a fixed premium to DICGC, which is not passed on to depositors.
  • Claim Process: If a bank fails, DICGC reimburses depositors up to ₹5 lakh after verifying claims submitted by the liquidator.
• Limitations:
  • Coverage Limit: The ₹5 lakh limit may not be sufficient for individuals or businesses with large deposit amounts.
  • Exclusions: Government and interbank deposits are not covered under DICGC.
  • Claims Processing Time: Though deposits are insured, the payout may take time as claims are handled through the bank’s liquidator.

Significance of DICGC for Depositors: 

• Protection Against Bank Failures: Deposits are protected, up to ₹5 lakh, even if the bank goes bankrupt.
• Encouraging Savings: With insurance protection, depositors are more confident in saving their money in banks.
• Broad Coverage: DICGC covers most types of banks, providing widespread protection.

Way Ahead

• In light of recent bank crises, such as the issues faced by New India Co-operative Bank, there is an ongoing proposal to increase the insurance limit.
• If approved, the increase in the insurance limit would offer greater protection for depositors, especially those with higher deposits in banks.
• This would provide additional security and enhance trust in the banking system.

Source: IE