Related Topic in KAS Prelims Syllabus:
Economy and Planning [Paper-II]: Recent fiscal and monetary policy issues and their impact, Structure of Indian Banking and Non Banking Financial Institutions and reforms
Context
- The failure of the Punjab and Maharashtra Co-operative (PMC) Bank reignited the debate on the low level of insurance for deposits held by customers in banks in India.
- Reserve Bank employees unions recently urged the government to hike the insurance cover on bank deposits from the present Rs 1 lakh to Rs 10 lakh.
What is deposit insurance?
- As per the RBI guidelines, all the commercial banks and cooperative banks are mandatorily required to insure the deposit under the Deposit Insurance and Credit guarantee corporation (DICGC).
- Each depositor of a bank is covered for maximum up to Rs 1 lakh. This amount is termed as ‘deposit insurance’.
- Every insured bank pays premium amounting to 0.001% of its deposits to DICGC every year.
- Deposit insurance scheme is mandatory for all banks and no bank can voluntarily withdraw from it.
- DICGC has the power and right to cancel the registration of an insured bank if it fails to pay the premium for three consecutive half-year periods
What happens to depositors’ money when a bank fails?
- When a bank is liquidated, depositors are entitled to receive an insurance amount of ₹1 lakh per individual from the DICGC.
- The ₹1 lakh insurance limit includes both principal and interest dues across savings bank accounts, current accounts, fixed deposits and recurring deposits held with the bank.
- DICGC does not deal directly with depositors.
- The RBI (or the Registrar), on directing that a bank be liquidated, appoints an official liquidator to oversee the winding up process.
Who are insured by the DICGC?
- The corporation covers all commercial and co-operative banks, except in Meghalaya, Chandigarh, Lakshadweep and Dadra and Nagar Haveli.
- Only primary cooperative societies are not insured by the DICGC.
- All bank deposits–savings, fixed, current and recurring—payable in India are covered.
Exemptions
DICGC does not include 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 specifically exempted by the DICGC with previous approval of RBI
Way Forward
- According to a recent report by SBI Research, the deposit insurance limit in India at Rs 1 lakh, is one of the lowest.
- As against this, in Brazil and Russia, the same stands at Rs 42 lakh and Rs 12 lakh respectively.
- India is among the countries that offer the lowest protection to depositors in cases of bank failure.
- India’s deposit insurance scheme covers as many as 70 per cent of bank depositors.
- But the accounts that have less than Rs 1 lakh together make up only about 8 per cent of total bank accounts.
- It denotes that an overwhelming number of accounts hold more than the ‘safe’ amount.
- It essentially means that a bank failure would be nothing short of an unprecedented catastrophe, because a depositor would be left with just one lakh of entire life’s savings, which — for most people — usually amount to several lakhs.
- Thus, the current limit of deposit insurance Rs 1 lakh was set in May 1993 and needs to be revisited.
- Reducing the time delay in settling claims is also the need of the hour.
