What happens to the depositors when the banks become bankrupt? Do the depositors lose their funds? Is there any coverage provided to the depositor? Who insures the depositors? How are they insured? The answers to all these questions are explained in the below article.
What is DICGC
The Deposit Insurance and Credit Guarantee Corporation, or DICGC, is a wholly-owned subsidiary of the Reserve Bank of India (RBI). The corporation was founded to protect the bank’s depositors and provide deposit insurance if the bank becomes bankrupt and fails to repay its depositors. DICGC was founded by combining two corporations- Deposit Insurance Corporation (DIC) and Credit Guarantee Corporation of India Limited (CGCI).
The agency aims to insure all kinds of deposits of the banks, including savings, recurring, fixed and current deposits and provide maximum coverage of ₹5 lakhs. This coverage is for an individual bank depositor and includes the principal and interest up to ₹5 lakhs.
Who governs DICGC
DICGC is governed by the provisions of ‘The Deposit Insurance and Credit Guarantee Corporation Act, 1961’ (DICGC Act) and ‘The Deposit Insurance and Credit Guarantee Corporation General Regulations, 1961’ framed and regulated by the Reserve Bank of India (RBI) under the provisions of sub-section (3) of Section 50 of the said Act.
Insurance Coverage under DICGC
DICGC was formed under the Deposit Insurance and Credit Guarantee Corporation Act, 1961 (DICGC Act, 1961). At the time of its formulation, as per Section 16(1) of the DICGC Act, the insurance coverage was limited to ₹1,500/- per bank per depositor for deposits held by them in the “same right and in the same capacity” in all the branches of the bank taken together, which was later on enhanced to ₹ 5,00,000/- per bank per depositor w.e.f. from 4th Feb 2020.
Funds maintained by DICGC
DICGC maintains the following types of funds-
- Deposit Insurance Fund- DIF or Deposit Insurance Fund is used to settle the claims of depositors. DIF is funded by the insurance premium received by the corporation from the banks.
- Credit Guarantee Fund- CGF or Credit Guarantee Fund is also used for providing coverage to the depositors if the bank fails to repay the depositors. CGF is funded by the guarantee fee received from the banks.
- General Fund- The DICGC uses the General Fund to meet the administrative and general expenses of the corporation.
Banks insured by the DICGC.
DICGC covers all commercial banks and cooperative banks.
- Commercial Banks- DICGC aims to cover all commercial banks, including the bank’s foreign branches in India, regional rural banks and local area banks.
- Co-operative Banks– DICGC covers all the Primary, Central and State co-operative banks functioning in States and Union Territories and has amended their Co-operative Societies Act as per the DICGC Act, 1961. All eligible cooperative banks, defined under Section 2(gg) of the DICGC Act, are covered by the Deposit Insurance Corporation.
List of Insured banks under DICGC
|1.||Public sector Banks||12|
|2.||Private Sector banks||21|
|4.||Small Finance banks||12|
|6.||Regional rural banks||43|
|7.||Local area banks||2|
|8.||State Co-operative banks||33|
|9.||District Central co-operative banks||352|
|10.||Urban Co-operative Banks||1503|
Registration of banks under the DICGC Act
- DICGC Act, 1961 mandates that newly established cooperative and commercial banks must register with the DICGC immediately after receiving their banking license from the RBI under Section 22 of the Banking Regulation Act, 1949.
- All new cooperative banks must be registered under DICGC within 3 months from their license application date.
- All new regional rural banks must be registered under DICGC within 30 days from their establishment in terms of Section 11A of the DICGC Act, 1961.
- As soon as the DICGC registers a bank, they are required to send an intimation letter to the bank within 30 days of the bank’s registration, indicating the bank that it has been registered under DICGC.
How DICGC works?
The DICGC working is explained below-
- In case of liquidation of the listed banks covered under the DICGC Act, the banks must furnish the data of outstanding deposits within 45 days from the date the bank has gone bankrupt.
- The banks send this list to the DICGC.
- DICGC will verify the lists, and on successful scrutiny, they will authenticate the data provided.
- DICGC will pay the money to the liquidator, which would be further transferred to the depositors.
- The insured amount must be paid to the depositor within 90 days of the liability.
Types of deposits covered by DICGC
DICGC insures all the bank deposits such as –
- Saving deposits
- Recurring deposits
- Current deposits
- Fixed deposits
Types of deposits not covered by DICGC
DICGC does not cover the following types of deposits-
- Inter-bank deposits
- Deposits from foreign governments
- Deposits of state or Central governments
- State Land Development Banks deposits as maintained with the State cooperative bank
- Any specifically exempted amount by the corporation with the previous approval of the RBI
- Any amount due on account of any deposit received outside India
- DICGC accreditation helps individuals know whether DICGC insures the banks in which they are depositing funds.
- At the time of registering the banks under DICGC, the corporation furnishes the bank with a printed certificate to them displaying the protection offered to the depositors under the DICGC scheme.
- In doubt, the depositor can directly question the banks’ officials.
Under the DICGC act, the registered banks are required to pay a certain amount of premium to the corporations to fund the corporation so that they can settle the claims of depositors in case the bank goes bankrupt. The banks will pay this premium on a half-yearly basis, and the burden of paying the premium will be borne by the banks themselves, which means it cannot be transferred to the depositors. The current premium rate from 1st April 2020 is fixed at 12 paise per 100 assessable deposits per annum.
The formula for calculating the premium is-
Deposits in rupees rounded to thousands X 0.06 / 100
Note- The deposits should be rounded off to the nearest thousand rupees.
- If the bank fails to pay the insurance premium to the corporation, it will be charged @8% above the bank rate on the premium amount or on the unpaid portion, as the situation may be, from the half-year’s beginning till the date of payment.
- The premium and interest amount can be paid in the following manner-
- It can be paid directly to the Deposit Insurance Fund account maintained by the RBI.
- It can be paid via crossed cheque or DD in favour of DICGC, payable at Mumbai.
The Deposit Insurance and Credit Guarantee Corporation (DICGC) functions under the provisions of ‘The Deposit Insurance and Credit Guarantee Corporation Act, 1961’ to provide insurance coverage to the bank’s depositors when the banks fail to repay its depositors. It ensures all deposits, such as savings, current, fixed etc. Each depositor is insured up to a maximum amount of ₹5,00,000 for both the principal and the interest held by them in the same right and same capacity as on the date of the bank’s liquidation. The insured banks are provided with a certificate depicting the offers for the depositors. The banks, in return, are required to pay an insurance premium to the corporation semi-annually, which helps the corporation settle the claim of the depositors. The DICGC covers all the commercial banks, including the foreign branches operating in India as well it also covers cooperative banks, whether, primary, state or central.
Frequently Asked Questions
Who is responsible for paying the cost of deposit insurance?
The deposit insurance cost is entirely paid by the insured banks.
What would be the maximum amount of insured deposits one person keeps in different bank branches?
In case of liquidation of a bank, the deposits kept by the person in different branches of that bank will be summed up, and a maximum of ₹5,00,000 will be insured as coverage.
Can any insured bank withdraw from the DICGC coverage?
No, the DICGC scheme is mandatory, and no bank can withdraw from it.
Can banks deduct any amount of dues payable by the depositor?
Yes, banks have the right to deduct the dues payable by the depositor, and the balance can be insured up to the maximum limit of ₹5,00,000.
Nishant is a qualified lawyer from NALSAR University of Law, Hyderabad having 7+ years of experience and is the Chief Compliance and Legal Officer at Wint Wealth. He has been working in the finance and wealth management space for the past 5+ years and is an NISM certified mutual fund expert.
He has previously worked for Khaitan & Co and Scripbox.