How are Your Bank Deposits Insured?

What is Deposit Insurance?

It's a government guarantee that an amount of up to ₹5 lakhs 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 Decision

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

Setting deposit 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 Amount

From 1993 to 2019, the coverage was ₹1 lakh 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 Insurance System?

DICGC, like 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 ₹1,46,842 crores.

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.