Explainer / Deposit insurance cover

The Reserve Bank employees unions have urged the government to hike the insurance cover on bank deposits from the present Rs 1 lakh to Rs 10 lakh.

The demand for increasing bank deposit insurance cover, which was last revised in May 1993, has come to the fore after the ongoing crisis at Punjab & Maharashtra Cooperative Bank.

Over the weekend, Finance Minister Nirmala Sitharaman had said the government would bring in a legislation during the ongoing winter session to increase the deposit insurance cover, but did not specify a number.

“We had earlier suggested hiking the insured deposit cover to at least Rs 10 lakh, covering all types of deposits of an individual, which we reiterate and urge the government to consider,” the All-India Reserve Bank Employees Association said in a statement.

What is deposit insurance?

The Deposit Insurance and Credit Guarantee Corporation (DICGC) insures each bank depositor up to a maximum of Rs 1 lakh for both principal and interest as on the date of liquidation or cancellation of a bank’s licence.

Banks covered by Deposit Insurance Scheme

All commercial banks, including the branches of foreign banks functioning in India, Local Area Banks and Regional Rural Banks. All eligible co-operative banks as defined in Section 2(gg) of the DICGC Act are covered by the Deposit Insurance Scheme. The Union Territories of Lakshadweep and Dadra and Nagar Haveli don’t have co-operative banks.

When was this concept introduced?

The concept of insuring deposits kept with banks received attention for the first time in 1948 after the banking crisis in Bengal. The question came up for reconsideration in 1949, but it was decided to hold it in abeyance till the RBI ensured adequate arrangements for inspection of banks.

Subsequently, in 1950, the Rural Banking Enquiry Committee also supported the concept. Serious thought to the concept was, however, given by the RBI and the central government after the crash of the Palai Central Bank Ltd, and the Laxmi Bank Ltd in 1960.

The Deposit Insurance Corporation (DIC) Bill was introduced in Parliament on August 21, 1961. After it was passed by Parliament, the Bill got the assent of the President on December 7, 1961 and the Deposit Insurance Act, 1961 came into force on January 1, 1962.

The Deposit Insurance Scheme was initially extended to functioning commercial banks only. This included the State Bank of India and its subsidiaries, other commercial banks and the branches of the foreign banks operating in India.

Since 1968, with the enactment of the Deposit Insurance Corporation (Amendment) Act, 1968, the Corporation was required to register “eligible co-operative banks” as insured banks under the provisions of Section 13 A of the Act.

The government, in consultation with the RBI, introduced a Credit Guarantee Scheme in July 1960. The RBI was entrusted with the administration of the scheme and was designated as the Credit Guarantee Organisation (CGO) for guaranteeing the advances granted by banks and other Credit Institutions to small scale industries. The RBI operated the scheme up to March 31, 1981.

The RBI also promoted a public limited company on January 14, 1971, named the Credit Guarantee Corporation of India Ltd. (CGCI).

With a view to integrating the functions of deposit insurance and credit guarantee, the above two organisations (DIC & CGCI) were merged and the present Deposit Insurance and Credit Guarantee Corporation (DICGC) came into existence on July 15, 1978.

Increase in insurance cover

Initially, the insurance cover was limited to Rs 1,500 only per depositor(s) for deposits held by him (them) in the “same right and in the same capacity” in all the branches of the bank taken together. However, the Act also empowers the Corporation to raise this limit with the prior approval of the central government. Accordingly, the insurance limit was enhanced from time to time as follows…

* Rs 5,000 with effect from January 1, 1968.

* Rs 10,000 with effect from April 1, 1970.

* Rs 20,000 with effect from January 1, 1976.

* Rs 30,000 with effect from July 1, 1980.

* Rs 1 lakh with effect from May 1, 1993.

As of March, the number of registered insured banks with DICGC stood at 2,098 comprising 103 commercial banks, 1,941 cooperative banks, 51 Regional Rural Banks, and three Local Area Banks.

The DICGC charges 10 paise per Rs 100 of deposits held by a bank. The premium paid by the insured banks to the Corporation is required to be borne by the banks, and not be passed on to depositors.

As per DICGC data, commercial banks paid a total premium of Rs 11,190 crore in 2018-19, while cooperative banks paid a premium of Rs 850 crore to cover deposits against the risk of default.

Cover is one of the lowest in the world

In dollar terms, the proposed cover at around $14,000 is much lower than in many other countries, the RBI unions said.

According to a recent report by SBI Research, at Rs 1 lakh, the cover is one of the lowest and is at only 0.9 times per capita income. As against this, in Brazil and Russia, the same stands at Rs 42 lakh and Rs 12 lakh respectively.

Noting that raising the coverage has been long overdue, the RBI unions noted that the Rs 1 lakh cover was set in May 1993, during the time the value of rupee has eroded sharply, necessitating an immediate hike.

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