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Getting to the bottom of deposit insurance in India

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The recent crisis in PMC Bank has blocked a substantial portion of depositors’ money with the bank.

The crisis is still not over and many fear the worse is yet to come if the bank goes in for liquidation.

ET explains the role of deposit insurance in India in such a situation 1.

What is deposit insurance?Like any other insurance policy, it is a protection cover against losses accruing to bank deposits if a bank fails financially and has no money to pay its depositors and has to go in for liquidation. 2.

How is it administered?In India, the Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the RBI was set up under an Act of the Parliament for the purpose of insurance of deposits and guaranteeing of credit facilities.

All types of deposits like savings deposits, term deposits and RDs are covered by DICGC.

However, government and inter-bank deposits are not covered.

Also, deposits of the state land development banks with the state co-operative bank are not covered. 3.

Are all categories of banks eligible for such an insurance?DICGC covers depositors of all commercial banks and foreign banks operating in India, state, central and urban co-operative banks, local area banks and regional rural banks provided the bank with which the deposit is made has bought the cover from DICGC. 4.

What has been the penetration of deposit insurance?About 92 per cent of deposit accounts of the entire banking system are fully protected under DICGC involving 28 per cent of the entire deposit amount of ₹120 lakh crore.

About 44 per cent of deposits with 1,941 co-operative banks have been covered by DICGC 5.

What is the current limit?The limit is capped at ₹1 lakh for both principal and interest held in a bank even if it has several deposits in different branches of the same bank.

The limit has been revised periodically.

From ₹5,000 per depositor in 1968, it was revised to ₹1 lakh in 1993.

This limit has been in force for 26 years which is the longest period that a limit has not been revised. 6.

Is the cap of ₹1 lakh per depositor adequate?The current upper limit of ₹1 lakh per depositor needs to be revisited, experts say.

Over the years, the composition of the bank deposits has undergone massive changes in India.

The DICGC coverage should be revised and bifurcated into 2 categories, said a State Bank of India report.

There should be 1) coverage of at least ₹1 lakh for savings bank or SB deposits (around 90 per cent of the total SB accounts) and 2) coverage of at least ₹2 lakh for term deposits (around 70 per cent of the total TD accounts).




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