6th February – Deposit Insurance in India

In News – The government, in the Union Budget tabled on Saturday, proposed to increase the insurance cover on bank deposits from Rs 1 lakh to Rs 5 lakh.

In September 2019, the Reserve Bank of India (RBI) slapped curbs on Punjab and Maharashtra Cooperative Bank Ltd (PMC Bank), a leading cooperative bank headquartered in Mumbai with deposits of over Rs 11,000 crore, appointed an administrator and superseded its board of directors, sending shock waves among thousands of its depositors. 

Role of DICGC-

  • The Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the RBI, gives insurance cover up to Rs one lakh deposits in banks.
  • Banks will now insure deposits up to Rs 5 lakh per customer with the DICGC as per the Budget proposal. 

Impact on depositors –

  • When a bank collapses, depositors will get Rs 5 lakh from the Corporation. However, now depositors holding more than Rs 5 lakh in their account have no legal remedy in case of the collapse of the bank. 
  • Once the Budget is passed by the Parliament, irrespective of the deposit amount, be it Rs 25 lakh or Rs 5 crore, the depositor will get only Rs five lakh if a bank collapses.

Impact on Banks –

  • Given the size of insured deposits is likely to increase the deposit insurance premium paid by banks will increase the operating expenses of banks and will be negative for their profitability to the extent they are not able to pass it on to the bank customers.
  • As on March 31, 2019, 28 per cent of deposits (in value terms) and 92 per cent of depositors (in terms of number of accounts) were covered by deposit insurance, which is likely to increase to 40-50 per cent.

Advantage –

It will increase confidence in small private sector banks, small finance banks and cooperative banks.

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