How are Your Bank Deposits Insured?
What is Deposit Insurance?
that an amount of up to
deposited in the bank is secured from losses caused by a bank's inability to pay its debts when due.
Why Deposit Insurance?
Small depositors don’t have the resources or the expertise to evaluate a bank's financial health. A
deposit insurance system instils confidence
in them by assuring that their money is safe.
The Necessity Emerged
The need for such insurance was first felt in India when
two big banks
, Palai Central Bank Ltd. and Laxmi Bank Ltd.,
collapsed in 1960
The RBI Response
The Deposit Insurance and Credit Guarantee Corporation (DICGC) was established to
provide a safety net to depositors
The Coverage Dec
Excessive coverage fostered 'moral hazard,'
tempting banks to take more risk
. Insufficient coverage left most deposits uninsured, undermining deposit insurance's intent.
The Thumb Rule
coverage at 2 times GDP per capita
aligns with income levels. Govts. adjust this limit as GDP per capita changes, ensuring effective protection.
The Coverage A
1993 to 2019
, the coverage was
but was increased to
₹5 lakhs in 2020
. Currently, we are at 2.9 times the GDP, comfortably above the standard of 2.
Who Funds the Insur
any insurance corporation
, collects premiums from banks & uses this fund to settle claims if a bank fails.
The Premium Charged
The premium is charged at
12 paise per ₹100
of deposit, which is called the ‘Flat Rate Premium’ and is the same for all Banks.
The DICGC Fund Size
The fund size of DICGC currently stands at
The Risk Overlooked
Huge Banks like HDFC or SBI are less risky than cooperative banks. Yet,
all banks pay the
same premium regardless of their risk profile
. The interest rates are also different.
How to Overcome?
Advanced economies adopt a differential premium system, with banks paying premiums based on risk.
Annual risk assessments
, while complex, address crucial issues effectively.
Earn 9 - 11%
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