Explainer: What is the insurance cover on your bank deposits?
Sai Krishna Muthyanolla
March 18, 2020
The last few years have seen many banks going bust. Is there any insurance cover for one’s deposits in banks? If yes, what is the amount? Here is a detailed explainer.
The Reserve Bank of India released a notice on 04 February 2020 stating that the Deposit Insurance and Credit Guarantee Corporation, abbreviated as DICGC, has raised the limit of insurance cover for depositors in insured banks from the current limit of ₹ 1 Lakh to ₹ 5 Lakh per depositor with effect from the same day.
Finance Minister Nirmala Sitharaman had proposed the same in her budget speech this year on 01 February 2020.
But what is DICGC? What is the insurance coverage on deposits offered byRBI?
What is DICGC?
Deposit Insurance and Credit Guarantee Corporation (DICGC) is a whollyowned subsidiary of Reserve Bank of India (RBI), which was set up to extendprotection to those depositors who may lose their money when a bank fails andhas no money to return to the depositors. DICGC was formed in July 1978 aftermerging Depositors Insurance Corporation (DIC) set up in 1968 and CreditGuarantee Corporation of India Ltd. (CGCI) set up in 1971. Deposit Insurance and Credit Guarantee Corporation Act
of 1961 provided forestablishing DICGC in order to insure deposits and guarantee credit facilitiesalong with other matters.
All commercial banks including the branches of foreign banks in India,local area banks and regional rural banks, and co-operative banks are insuredunder DICGC. Savings, fixed, recurring, and current deposits are covered byDICGC. In fact, all deposits except that of foreign governments, central/stategovernments, and interbank deposits are covered by DICGC. Deposits of stateland development banks with state co-operative banks are also not covered underthe scheme. The scheme is mandatory for all banks and cannot be withdrawn.
Insurance limit has been extended to ₹ 5 Lakhs
Each depositor is covered for ₹ 5 Lakh including principal and interest.This amount was initially ₹ 1 Lakh and with effect from 04 February 2020, thelimit was raised to ₹ 5 lakhs. This was notified by the RBI on the same day.
DICGC pays the amount to the liquidator who is responsible to pay thedepositors. Based on the list of depositor wise claims submitted by theliquidator, DICGC scrutinizes the list and makes payment to the liquidator, whomust then repay depositors. An individual or depositor can recover money onlyif the bank gets closed.
An individual who has deposited in a bank which has collapsed will be able to recover up to ₹ 5 Lakhs only even if they have more than ₹ 5 lakhs in the bank. This amount is calculated per depositor across all branches of the bank. Both individual and joint accounts are considered separate, thereby, insurance coverage is separate for both these accounts. The amount payable by the depositor to the bank is deducted.  However, the individual’s deposits in other banks are not considered in this calculation.
Based on total deposit with banks, premium amount must
be paid to DICGC
Banks are liable to pay a premium amount which is determined based on the total deposits with it as on the last day of the preceding half-year. That is, if a bank is supposed to pay the premium for the half year ending March 2019, amount is calculated as on 30 September 2018.
In order to make the payment to DICGC, banks are given two months’ time. In case of any delay, by even one day, banks will have to pay penal interest at 8% above the bank rate from the beginning of the financial year till the date of payment. In other words, banks should ensure that payment for half year ending in March should reach the corporation on or before 30 November and for the half year ending September, it should be before 31 May. Even if the payment reaches DICGC for the half year ending March on 01 December, then the bank will have to pay an interest of Bank rate + 8% for the period 01 October to  01 December.
Registration of banks can get cancelled on failure to
pay premium for three years
If a bank fails to pay premium for three consecutive years, then DICGCcan cancel the registration of the bank. This will be notified in newspapers.What this means is that the bank will not be able to receive fresh deposits.Its license can get cancelled and will no longer be recognized as a bankingcompany or co-operative bank as per Banking Regulation Act of 1949. If the bank’s registration is cancelled, thendeposits of the bank will be insured only till the date of cancellation.
Damodaran committee constituted by RBI in 2011 had
suggested increase in ceiling
The committee under the chairmanship of M Damodaran presented a report on banking services rendered to retail and small customers in 2011. Thiscommittee had recommended way back in 2011 that the insurance ceiling be raisedfive-fold from ₹ 1 Lakh to ₹ 5 Lakh. However, this ceiling was increased onlyafter the Mumbai based urban co-operative, PMC Bank (Punjab and Maharashtra Co-operative Bank Limited) collapsed. Thisincrease in the ceiling is aimed at giving more security and enhancing people’sconfidence on banks.
DICGC paid ₹ 296 crores to Depositors while it
collected ₹ 88,523 crores as premium
Since inception, DICGC has received premium payment of ₹ 88,523 crores. On the otherhand, it paid out ₹ 296 crores to depositors of failed commercial banks basedon claims,  as on 10 December 2019.
Moratorium has been imposed by RBI on Yes Bank Private
Limited
Recently, on 05 March 2020, Yes Bank Private Limited. made headlines as it was placed under moratorium by RBI because of the bank’s rapidly deteriorating financial position relating to liquidity, capital and other critical parameters. The absence of any credible plan for infusion of capital has necessitated the RBI to take immediate action.
What should you do – Keep track of bank’s activities
As a depositor, it is always good to keep an eye on the bank’sactivities so as to get an idea of the bank’s stability. Since insurance isdependent on the bank, holding accounts in multiple banks or diversifying one’ssavings will also be helpful. Further, insurance amount is based on type ofownership of account. Thus, depositing money in a bank in different types ofownership may also be considered.
For further details, click the links below.