Centre might raise the Deposit Insurance Limit

Context: The government is considering increasing the insurance cover limit on bank deposits from the current Rs. 5 lakh per depositor.

Relevance of the Topic: Prelims: Deposit Insurance, DICGC

What is Deposit Insurance?

Deposit insurance is a financial safety net that protects depositors from bank failures by guaranteeing a certain amount of their money.
In India, deposit insurance is managed by the Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly owned subsidiary of the Reserve Bank of India (RBI). This system helps maintain trust in the banking sector, prevent bank runs, and promote financial stability.

It is the guarantee that often provides for a specific remedy to the creditor if his debtor does not return his debt.

All deposits and interest income are insured by Deposit Insurance and Credit Guarantee Corporation (DICGC). It is the second oldest insurer in the world.
It is a statutory body created by the Deposit Insurance and Credit Guarantee Corporation Act, 1961.
It is a wholly owned subsidiary of RBI.
Insured banks by DICGC:
- All Scheduled Commercial Banks
- Foreign Banks
- Small Finance Banks
- Payment Banks
- Regional Rural Banks
- Local Area Banks
- State Co-operative Banks
- District Central Co-operative Banks
- Urban Co-operative Banks.
Note: Primary Cooperative Societies are not covered by DICGC.

Evolution:
- 1993: The deposit insurance limit was fixed at ₹1 lakh.
- 2020: The government raised it to ₹5 lakh, following the Punjab and Maharashtra Cooperative Bank (PMC Bank) crisis.
- 2024: RBI’s Deputy Governor proposed a periodic increase in deposit insurance based on factors such as inflation, deposit growth, and rising income levels.
- 2025: Finance Ministry is actively considering increasing the deposit insurance limit further, following the New India Cooperative Bank crisis.

Insurance Cover amount:
- Currently, the DICGC has set the insurance cover limit to 5 lakhs. This covers all the money (Principal + Interest) with the bank e.g., savings, term deposit, recurring deposits etc.
- Deposits kept in different branches of a bank are aggregated for the purpose of insurance cover and maximum amount of up to rupees 5 lakhs is paid.
- If funds are in different types of ownership or are deposited into separate banks they would then be separately insured.
Insurance Premium is provided by banks. This amount stands at Rs 12 paisa per Rs 100.
When is DICGC liable to pay: If a bank goes into liquidation, DICGC is liable to pay to the liquidator the claim amount of each depositor up to Rs. 5 lakhs within two months from the date of receipt of the claim list from the liquidator.

Ensures Financial Stability:
- Prevents bank runs (mass withdrawal of deposits during financial crises).
- Strengthens confidence in the banking system, especially for small depositors.
Protects Small Depositors:
- A large percentage of depositors (97.8%) are fully covered, ensuring their money remains safe.
Encourages Savings and Banking Growth:
- With insured deposits, people are more likely to trust banks and deposit their money, promoting financial inclusion.

Inadequate Coverage Limit: The current ₹5 lakh insurance cap may not be sufficient in the face of rising inflation and increasing deposits.
Delays in Payouts: When a bank collapses, depositors often face delays in receiving insured amounts.
Moral hazard: Since deposits are insured, banks might take excessive risks, knowing that the government will protect depositors.
Limited coverage of high-value deposits: While 97.8% of accounts are insured, only 43.1% of total deposit value is covered, leaving large depositors exposed.

Increase the Deposit Insurance limit periodically: The insurance cap should be linked to inflation and economic growth, ensuring depositors receive adequate protection.
Strengthen regulation of Cooperative banks: RBI must closely monitor urban cooperative banks and take pre-emptive action to prevent failures.
Faster claim settlement mechanism: DICGC must speed up payout processing to ensure depositors do not suffer delays.
Enhance public awareness: Many depositors are unaware of deposit insurance coverage, necessitating awareness campaigns.