Deposit Insurance and Credit Guarantee Corporation (DICGC): All You Need to Know
The idea of deposit insurance, with respect to deposits kept with the banks, gained popularity after witnessing banking crises in Bengal in 1948. After the failure of Palai Central Bank Ltd and Laxmi Bank Ltd.in 1960. Initially it extended to functioning commercial banks and branches of foreign banks operating in India.
Deposit Insurance and Credit Guarantee Corporation is a wholly-owned subsidiary of the Reserve Bank of India (RBI) that was established under the Deposit Insurance and Credit Guarantee Corporation Act, 1961 and came into existence on 15th July 1978. It integrates two aspects namely – Deposit Insurance and Credit guarantee. Credit guarantee encourages commercial banks to cater credit needs of neglected sectors by providing guarantee cover to the loans and advances granted by the credit institutions to small and needy borrowers. It is the second oldest deposit insurer in the world.
What is a Banking Crisis?
A bank has two primary functions: it accepts funds in the form of deposits and lends them in the form of loans and advances. Fixed deposits and saving bank deposits are liabilities for a bank, whereas the loans lent are receivables (assets) for the bank.
A banking crisis is when the banks face solvency and liquidity problems simultaneously.
- Insolvency of a bank: It means the liabilities (obligations) of the bank exceed its assets. The value of assets decline, thereby directly impacting the capital of the bank. In such cases, depositors may lose trust and demand their money back, which results in liquidity problems.
- Illiquidity of a bank: Banks have too many liabilities and do not have enough cash/ liquid assets, including money market instruments, to satisfy those liabilities.
In India, Deposit Insurance and Credit Guarantee Corporation (DICGC) insures all bank deposits for up to a limit of ₹5,00,000 for each deposit from each bank.
What is DICGC?
DICGC is a wholly-owned subsidiary of the RBI. The Corporation has been formed for the sole purpose of insuring deposits and guaranteeing credit facilities. DICGC provides a protective cover when a bank cannot service its depositors.
DICGC covers all commercial banks, branches of foreign banks, local area banks, regional rural banks and Cooperative banks. Each depositor in a bank is insured up to a maximum of ₹ 5,00,000 (rupees five lakhs) for both principal and interest amounts held by them in the same right and capacity. The deposits kept in different bank branches of a bank are aggregated for insurance cover, and a maximum amount of up to ₹ 5,00,000 is covered. The DICGC has come a long way from initially covering deposits up to ₹1,500 to covering deposits up to a maximum of ₹5,00,000 (w.e.f. 4th February 2020) per account holder per bank.
How does Deposit Insurance work?
The banks pay advance insurance premiums to DICGC twice a year. Presently the premium payable is a flat rate premium of 12 paise per ₹100 deposit. DICGC does not deal directly with the depositors of the failed banks. It will settle claims as follows:
- In case the bank goes into liquidation: The official liquidator makes a claim on behalf of the depositor within three months of assuming charge as liquidator. DICGC will pay valid insurance claims within two months from receipt of the claim by the liquidator. The liquidator will disburse the amount to each insured depositor corresponding to their claim amount.
- Amalgamation/ Reconstruction: Amalgamation means when one bank is acquired/ merged with another bank. The seller bank is a transferor bank who will receive consideration in exchange for its holding. DICGC will pay the transferor bank the difference between the full amount of the deposit or maximum insurance coverage whichever is less and the amount received by the transferor bank on account of amalgamation/reconstruction, within 2 months from receipt of the claim list from the transferee bank(acquirer bank).
- Banks under ‘All Inclusive Directions’ of RBI with restrictions on withdrawal of deposits: Section 35 A of the Banking Regulation Act 1949 empowers Reserve Bank of India to issue directions. These are issued to prevent affairs of the banking company conducted in a manner which adversely affects the interest of depositors, for example, if the bank’s financial position deteriorates. This does not mean cancellation of the Bank’s licence. The depositors can contact the bank officials and submit the form stating the alternate bank details and other necessary documents to the bank, which will submit the list of depositors’ claim to DICGC.
What does DICGC not insure?
It insures all deposits such as savings, fixed, current, recurring, etc., except the following types of deposits:
- Deposits of foreign Governments;
- Deposits of Central/State Governments;
- Inter-bank deposits;
- Deposits of the State Land Development Banks with the State co-operative bank;
- Any amount due on account of any deposit received outside India
- Any amount which has been specifically exempted by the corporation with the previous approval of the Reserve Bank of India
How to ascertain if the Bank is covered under the insurance of DICGC?
DICGC furnishes banks with a printed leaflet for display which states information regarding the insurance provided to the depositors of the insured banks. However, it is always advisable to check whether the concerned bank appears in the list of banks insured by DICGC. Also, all KYC requirements should be fully complied with to expedite claim settlement by DICGC.
What is the scope of Insurance?
|Saving Deposits||Deposits of Foreign Governments|
|Fixed Deposit||Deposits of Central/ State Government|
|Current Deposit||Inter-Bank Deposits|
|Recurring Deposits||Deposits of State Land Development Bank with State Co-operative Bank|
|Any Amount due on account of any deposit received outside India|
|Any amount which has been specifically exempted by DICGC with the previous approval of RBI|
What is the maximum amount of Deposit Insurance?
Each depositor is insured up to a maximum of ₹5,00,000, including principal + accrued interest amount. It must be in the same right and in the same capacity. For example an individual may hold deposit amount in his individual capacity as well as in a representative capacity by holding a position of director in the company or karta of HUF or partner in a firm. Insurance coverage will be provided for representative capacity in addition to individual capacity. The Insurance will be provided for the deposit amount as on the date of liquidation, cancellation of bank’s licence or the date on which the scheme of amalgamation/ reconstruction comes into force.
This can be illustrated with the following illustration:
|1||Mr P has ₹4,50,000 in the Borivali Branch and ₹ 3,00,000 in the Thane Branch of an insured bank.||The insurance coverage is with respect to a bank and not branch-wise. For the purpose of claiming these balances will be aggregated. And Mr P will get ₹5,00,000 only.|
|2||Mr Q has the following deposits with a bank insured by DICGC.||DICGC will aggregate all the deposits viz savings, fixed, current and recurring deposits to determine the maximum coverage. Mr Q will get ₹5,00,000 only.|
|3||In addition to balances stated in example 2. Mr Q, as director of ABC Pvt . Ltd., holds ₹10,00,000 in a savings bank account.||In this case, Mr Q holds an amount as director of ABC Pvt Ltd. It is holding an amount in a different capacity; hence he will receive ₹5,00,000 in the capacity of a director. Therefore in addition to insurance coverage in his individual capacity he will also get insurance coverage as director of ABC Pvt. Ltd.|
|4||Mr G and Mrs D hold a joint savings bank account. The balance amounts to ₹10,00,000.||The coverage will be awarded to each holder respectively. Mr G will get coverage of ₹5,00,000, and Mrs D will get coverage of ₹5,00,000, respectively. i.e., for joint account holders, coverage will not be clubbed.|
|5||In addition to balances stated in example 1, Mr P holds ₹4,00,000 principal and ₹25,000 accrued interest on behalf of his minor son M.||Apart from his coverage of ₹5,00,000 as in example one, Mr P will get ₹4,25,000 in the capacity of a Guardian for his minor son M.|
Under what circumstances can DICGC withdraw its coverage from a bank?
If an insured bank fails to pay the premium for three consecutive periods, then DICGC may cancel the registration of an insured bank. When DICGC withdraws its coverage from an insured bank, it will notify the public. The bank will not be allowed to accept fresh deposits from the public. DICGC will provide insurance coverage up to the date of cancellation of registration.
Deposits with banks are considered a popular avenue of investment. Although the insurance coverage has been increased from ₹1,00,000 to ₹5,00,000 w.e.f 4th February 2020. Despite that, investors should diversify their investments to maximise their earnings and safeguard them.
Frequently Asked Questions(FAQs)
Are deposits with different banks aggregated while computing the maximum coverage of ₹5,00,000?
Deposit Insurance is available with respect to a bank. Hence, accounts with different banks are eligible for separate insurance coverage and will not be aggregated.
Can banks deduct the amount due to them by the depositor from deposit insurance?
The deposit insurance coverage is available on net amount i.e after setting off the amount payable by the depositor to the bank from the total deposits held by the depositor.
Can banks charge the premium paid to DICGC from its depositors?
No, the banks cannot charge the premium paid to DICGC from its depositors.
Can insured banks withdraw from the DICGC coverage?
Banks must register with DICGC. They cannot withdraw from the coverage.