Bank deposit insurance: where it works, where it isn’t enough

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DICGC ensures depositors’ money stays safe, at least to some extent, but the absence of risk-based premiums is flawed, experts say

All commercial banks including branches of foreign banks operating in India, local banks and regional rural banks are insured under the DICGC scheme. (Representative image)

At an event earlier this month, Prime Minister Narendra Modi handed over checks to beneficiaries under the Deposit Insurance and Credit Guarantee Corporation Act (DICGC) and said 1,300 more than a lakh of people had been paid out as part of the program.

It is heartwarming to know that the government ensures that depositors’ money is guaranteed, at least to some extent, in the event of bank failure. Yet economists and banking professionals have pointed to the flaws in the system, particularly the lack of risk-based deposit insurance premiums.

What is deposit insurance?

It is the insurance of your deposit in a bank, through instruments – savings account, fixed deposit, recurring deposit, etc. Under the DICGC law, in India your bank money is insured up to ₹ 5 lakh. This means that if you have invested 10 lakh on various deposits in a failed bank, you will get back at least ₹ 5 lakh without delay.

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The scheme is not really new. Deposit insurance coverage of 30,000 was introduced in 1961 and increased to 1 lakh in 1993. Since then it has remained the same until the Center, in the 2020 Union budget, increased the amount. insurance 5 lakh. What prompted this decision was a wave of bank failures, such as Punjab & Maharashtra Co-operative (PMC) Bank, Yes Bank and Lakshmi Vilas Bank, which have caused immense hardship for small investors – including retirees – who lost immediate access to their money.

Have Indian bank depositors ever lost money?

They didn’t, say the bankers. Whenever a planned commercial bank went bankrupt, the Reserve Bank of India (RBI) would make sure that depositors eventually got their money back. But the process stretched for years together, even up to 10 years, as depositors had to wait for the bank to liquidate before their funds were returned.

Under DICGC, depositors will receive ₹ 5 lakh within 90 days. The first 45 days are for the DICGC to collect deposit account information. Balance days are for reviewing information and refunding depositors.

Who provides the insurance?

DICGC, a wholly owned subsidiary of RBI, facilitates coverage of ₹ 5 lakh, including principal and interest amounts. It has a nearly fully automated system for receiving complaints and making settlements. The deposit insurance premiums are fully covered by the respective banks and the coverage is provided by the insurance companies.

All commercial banks including branches of foreign banks operating in India, local banks and regional rural banks are insured under the program. It is compulsory and no bank can withdraw from it. Apart from that, all state, central and primary cooperative banks – called urban cooperative banks – are also covered by the scheme. This is important, because most of the failed banks in the recent past fell into this category.

However, the DICGC does not offer insurance to depositors of non-bank financial corporations (NBFCs) and primary cooperative societies.

What are the perceived flaws in the DICGC?

Economists say the DICGC should opt for risk-based deposit insurance premium pricing, rather than the flat rate pricing it currently stipulates. This means that higher risk banks should pay higher premiums. Not only would this be a fairer system, but it would also encourage institutions to be “less risky”. The current uniform premium standard needs to be revised, experts say.

In addition, there is concern that private insurers will refrain from covering bank deposits, given the giant risk this can represent. In addition, investors are more likely to feel reassured when the insurer covering their deposits is backed by the government. After all, it’s not uncommon for insurance companies themselves to go bankrupt – in 2008 AIG faced a huge crisis and had to be rescued by the US government.

There is also concern that increased deposit insurance could lead to investor complacency. If a ₹ 5 lakh deposit is going to fetch 5% in bank A and 7% in bank B, the investor will gravitate towards the latter although it is eminently riskier, as the insurance coverage would be the most important anyway. same. Experts point out that investors who are advised to exercise caution when investing in mutual funds, stock markets and real estate should also be advised to study banks before investing their money in them.

How can investors optimize the system?

The 5 lakh limit applies to an investor’s deposit in a particular bank, in all branches. Thus, investors can spread their deposits among different banks, so that they have 5 lakh coverage in each of these banks.

It can be noted that it is not useful to spread the deposits among different branches of the same bank, as the total amount of insurance will be capped at 5 lakh. For example, an investor who has ₹ 20 lakh can put ₹ 5 lakh each in four different banks, so that the entire ₹ 20 lakh is covered.

The best course, of course, would be to exercise caution when choosing a bank. Opting for one just because it offers higher interest rates is never safe. A strong balance sheet, an extensive branch and ATM network, and good service standards would be more cautious filters.


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