Deposit Insurance and Credit Guarantee Corporation

The Deposit Insurance and Credit Guarantee Corporation (DICGC) is an institution established in India to protect the interests of depositors and to promote confidence and stability in the banking system. It provides deposit insurance to depositors in case a bank fails, ensuring that small and medium depositors do not lose their savings. The DICGC also extends credit guarantee facilities to encourage banks to lend to priority sectors. Functioning under the Reserve Bank of India (RBI), the corporation plays a crucial role in safeguarding the integrity of the Indian financial system.

Establishment and Background

The DICGC was established on 15 July 1978 under the Deposit Insurance and Credit Guarantee Corporation Act, 1961, following the merger of two earlier institutions:

1. Deposit Insurance Corporation (DIC) – set up in 1962, and
2. Credit Guarantee Corporation of India (CGCI) – established in 1971.

The merger aimed to integrate deposit protection and credit guarantee functions into a single entity for greater efficiency. The corporation operates as a wholly owned subsidiary of the Reserve Bank of India (RBI), with its headquarters in Mumbai.
The introduction of deposit insurance in India was primarily influenced by the bank failures of the 1950s and 1960s, which had shaken public trust in cooperative and smaller commercial banks. The government and RBI decided to create a formal mechanism to protect depositors and enhance financial stability.

Objectives of the DICGC

The key objectives of the DICGC are:

• To provide insurance coverage for bank deposits to ensure depositor protection.
• To promote confidence in the banking system and prevent bank runs.
• To support the credit system through guarantees on loans and advances, particularly to weaker sectors.
• To contribute to the stability and soundness of the Indian financial structure.

Functions of the DICGC

The DICGC performs two principal functions: deposit insurance and credit guarantee, though the latter has been largely discontinued since the late 1990s.
1. Deposit Insurance Function:

• The Corporation insures all deposits accepted by banks, including savings, fixed, current, and recurring deposits.
• In the event of bank liquidation or failure, the DICGC compensates depositors up to a prescribed limit.

2. Credit Guarantee Function:

• Initially, DICGC provided credit guarantees to encourage banks to lend to small borrowers and priority sectors by reducing their risk exposure.
• This function was later separated with the creation of Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) in 2000, which now handles credit guarantees for MSMEs.

Coverage and Extent of Insurance

The deposit insurance scheme applies to almost all banks in India, except for a few categories as defined by law.
Banks covered under DICGC insurance:

• All commercial banks, including branches of foreign banks operating in India.
• Regional Rural Banks (RRBs).
• Co-operative Banks, including both state and district central cooperative banks.
• Small Finance Banks (SFBs) and Payment Banks.

Banks not covered:

• Primary cooperative societies and non-banking financial companies (NBFCs) are excluded.

Insurance Limit and Coverage

Initially, the insurance coverage limit was modest. Over the years, it has been revised several times to reflect inflation and banking expansion.

As per the Union Budget 2020–21, the deposit insurance cover was raised from ₹1 lakh to ₹5 lakh per depositor per bank, greatly enhancing depositor confidence. This limit covers both principal and interest held in a bank account.
The insurance coverage is automatic—depositors need not apply or pay separately for it, as the banks themselves pay an insurance premium to the DICGC.

Premium and Funding

• Banks pay the insurance premium to the DICGC, not depositors.
• The current premium rate (as per recent RBI guidelines) is ₹0.12 per ₹100 of assessable deposits annually.
• The DICGC maintains a Deposit Insurance Fund (DIF), built from these premiums and investment income, used to pay claims in case of bank failures.

Procedure for Settlement of Claims

When an insured bank is liquidated or placed under moratorium, the following steps are taken:

1. The liquidator or administrator of the failed bank submits depositor claims to the DICGC within three months.
2. DICGC verifies the claims and reimburses up to the insured limit.
3. Payment is made to the liquidator, who then distributes it among eligible depositors.

To expedite settlements, the Finance Act, 2021 introduced amendments allowing depositors to receive insured amounts within 90 days of a bank being placed under moratorium, rather than waiting until liquidation.

Role During Bank Crises

The DICGC has played a crucial role in protecting depositors during bank failures, especially in the cooperative banking sector. Some notable cases where DICGC provided depositor protection include:

• Palai Central Bank (1960) – one of the earliest failures prompting deposit insurance legislation.
• Madhavpura Mercantile Cooperative Bank (2001).
• PMC Bank (2019) and other recent cooperative bank crises.

The enhanced limit of ₹5 lakh and the faster claim settlement process have greatly strengthened depositor protection in such situations.

Management and Governance

The DICGC is governed by a Board of Directors under the supervision of the Reserve Bank of India.
Composition of the Board:

• Chairman: Deputy Governor of the RBI (ex-officio).
• Representatives from:
  • The Central Government.
  • RBI.
  • Commercial banks, cooperative banks, and other financial institutions.

This structure ensures that both regulatory and industry perspectives are incorporated into decision-making.

Importance of DICGC in the Banking System

The DICGC contributes significantly to financial system stability through:

• Depositor Protection: By guaranteeing repayment up to ₹5 lakh, it prevents panic withdrawals during financial distress.
• Banking Confidence: Encourages savings and promotes trust in the formal banking sector.
• Systemic Stability: Prevents bank runs and ensures continuity of operations.
• Financial Inclusion: Encourages people in rural and semi-urban areas to use banks without fear of losing deposits.

Limitations

While effective, the DICGC scheme has certain limitations:

• Insurance limit (₹5 lakh) may still be inadequate for large depositors.
• Claims settlement depends on timely cooperation from bank liquidators.
• It does not cover losses due to fraud or market value fluctuations.
• Cooperative bank failures remain a recurring challenge due to weak governance.

Recent Developments

• In 2021, the Deposit Insurance and Credit Guarantee Corporation (Amendment) Act was passed, enabling quicker access to insured deposits within 90 days of a bank’s moratorium.
• DICGC has expanded its coverage to all active deposit-taking institutions regulated by the RBI.
• Continuous review of premium rates and fund adequacy ensures that the Corporation remains financially sound.