Deposit Insurance in India

Deposit Insurance in India is a financial safety mechanism designed to protect depositors against the loss of their bank deposits in the event of a bank failure. It ensures that even if a bank becomes insolvent or is unable to repay its customers, depositors are guaranteed a certain amount of their deposits through a legally established insurance system. This mechanism plays a crucial role in maintaining public confidence in the banking system and ensuring financial stability.

Background and Evolution

The concept of deposit insurance in India emerged after a series of bank failures in the 1940s and 1950s, which eroded public confidence in the banking system. To restore trust and strengthen the banking sector, the Deposit Insurance Corporation (DIC) was established under the Deposit Insurance Corporation Act, 1961 — making India the second country in the world, after the United States, to introduce deposit insurance.
The DIC began operations on 1 January 1962 under the Reserve Bank of India (RBI). In 1978, it was merged with the Credit Guarantee Corporation of India, forming the Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly owned subsidiary of the RBI. Since then, DICGC has been responsible for implementing and managing deposit insurance across all eligible financial institutions in India.

Objectives of Deposit Insurance

• To protect small depositors from the risk of losing their savings due to bank failures.
• To enhance public confidence in the banking system and promote financial stability.
• To provide a safety net that reduces the chances of bank runs.
• To support the orderly resolution of failed banks without causing panic in the financial system.

Governing Body: DICGC

The Deposit Insurance and Credit Guarantee Corporation (DICGC) operates under the Reserve Bank of India Act, 1934, and the Deposit Insurance and Credit Guarantee Corporation Act, 1961.
Key features of DICGC:

• It functions as a statutory body under the control of the Reserve Bank of India.
• Its Board of Directors consists of representatives from the RBI, the Government of India, and other financial sectors.
• The corporation’s head office is located in Mumbai.

Coverage of Deposit Insurance

Deposit insurance in India covers a wide range of banks and deposit types.
Banks Covered:

• All commercial banks, including public sector banks, private sector banks, foreign banks operating in India, small finance banks, and regional rural banks (RRBs).
• All co-operative banks, both state and district-level (subject to DICGC coverage rules).

Deposits Covered:

• Savings accounts.
• Current accounts.
• Fixed deposits.
• Recurring deposits.

Deposits Not Covered:

• Deposits of foreign governments.
• Inter-bank deposits.
• Deposits of the Central and State Governments.
• Amounts due on account of unpaid loans or borrowings from the bank.

Extent of Insurance Coverage

The amount of deposit insurance has been revised periodically to match inflation and financial growth.

Currently, each depositor is insured up to ₹5,00,000 (five lakh rupees) per bank, including the principal and interest amounts, as per the Union Budget 2020 amendment. This means that if a bank fails, a depositor can claim up to ₹5 lakh from the DICGC, irrespective of the total amount held in that bank.
If a depositor holds accounts in multiple banks, each bank’s deposits are insured separately. However, deposits in different branches of the same bank are treated as one account for insurance purposes.

Funding of Deposit Insurance

The deposit insurance scheme is funded through premiums paid by the insured banks, not by depositors.

• Every insured bank pays a premium to the DICGC based on its total deposits.
• The current premium rate is ₹0.12 per ₹100 of assessable deposits (or 12 paise per ₹100).
• The DICGC maintains a Deposit Insurance Fund (DIF) to meet claims from depositors when a bank fails.

The RBI and the Government of India do not contribute directly to this fund, but DICGC operates under RBI supervision to ensure efficient management.

Procedure for Settlement of Claims

When an insured bank fails or is placed under liquidation, the following procedure is followed for settlement:

1. The RBI or the Registrar of Cooperative Societies appoints a liquidator for the failed bank.
2. The liquidator prepares and submits a list of depositors and their outstanding balances to the DICGC.
3. DICGC verifies the claims and settles the insured amount (up to ₹5 lakh) directly to the depositors through the liquidator within 90 days of receiving the claim list.

In 2021, the Government of India amended the DICGC Act to ensure time-bound payments to depositors of stressed or under moratorium banks, guaranteeing that insured deposits are paid within 90 days, even if the bank’s resolution is pending.

Significance of Deposit Insurance

• Depositor Confidence: Ensures that the public trusts the banking system, even during crises.
• Financial Stability: Prevents panic withdrawals and bank runs, maintaining overall stability in the financial sector.
• Protection of Small Depositors: Safeguards the interests of low-income individuals who rely heavily on bank savings.
• Crisis Management: Facilitates the smooth resolution and liquidation of failed banks.
• Promotion of Banking Habits: Encourages more people to use formal banking channels, aiding financial inclusion.

Limitations of the Deposit Insurance Scheme

• Limited Coverage: While ₹5 lakh covers the majority of small depositors, large depositors may still face significant losses in case of bank failure.
• Delayed Payments (Earlier): Before the 2021 amendment, claims settlement could take several years.
• Exclusion of Non-Bank Financial Companies (NBFCs): Deposits with NBFCs are not covered under DICGC.
• Awareness Gap: Many depositors remain unaware of their insurance coverage rights and limits.
• Dependence on Bank Premiums: The sustainability of the fund depends entirely on bank contributions.

Recent Developments

• In August 2021, the Deposit Insurance and Credit Guarantee Corporation (Amendment) Act, 2021 was passed, mandating that DICGC must pay insured deposits within 90 days even if the bank is under RBI-imposed restrictions such as a moratorium.
• DICGC has actively settled claims for depositors of stressed cooperative banks like PMC Bank, Rupee Cooperative Bank, and Lakshmi Vilas Bank, strengthening depositor protection.
• Continuous efforts are underway to enhance the efficiency of claim settlement and increase public awareness of deposit insurance benefits.

Comparative Perspective

Compared to global standards, India’s deposit insurance coverage of ₹5 lakh (approximately USD 6,000) is moderate but sufficient to protect over 98% of individual deposit accounts, though it covers about 50% of total deposit value. Many developed countries provide similar or higher limits in proportion to their per capita income.