Context:
The Indian government is actively considering increasing the deposit insurance limit from Rs 5 lakh to Rs 15 lakh. This move comes after the recent scam at New India Co-operative Bank, which raised concerns about the safety of depositors’ money.
Plays a key role in ensuring depositor safety: Deposit Insurance and Credit Guarantee Corporation (DICGC).
Understanding Bank Deposit Insurance
Bank deposit insurance is a financial safety net that protects depositors from losses if their bank fails. It helps stabilize the financial system and prevent panic.
- Current Coverage
- Deposit insurance covers “principal + interest” up to ₹5 lakh per bank.
- If ₹5 lakh is principal, forfeiture of interest in a bank failure.
- Risk Management Strategies for Depositors
- Distributing deposits among multiple banks reduces risk exposure.
- Different sequences of joint accounts: They will be insured separately for ₹5 lakh each.
How DICGC Works?
Established in 1978 with the merger of Deposit Insurance Corporation with Credit Guarantee Corporation.
- Collects insurance premiums from banks, not depositors.
- Premium rate: 0.12% per annum (₹0.12 per ₹100 of assessable deposits).
- Deposit Insurance Fund (DIF) stood at ₹1.98 trillion in FY24.
Change coming in Deposit Insurance
- Risk Based Premiums
- RBI Deputy Governor Swaminathan J suggests connecting the insurance premium with the risk profiles of individual banks.
- High risk banks will end up paying more in insurance premiums encouraging better risk management.
Raising Awareness
- 97.8 percent of the deposit accounts fully insured but only 43.1 percent of the total deposits protected.
- To ensure greater awareness among depositors about the benefits of deposit insurance, targeted awareness campaigns are planned by DICGC.
In a scenario of financial uncertainty, a higher deposit cover of ₹15 lakhs could become a great boon for depositors and inspire confidence in the banking system of India.
Source: BS
