Insurance Cover on Bank FDS, Deposits Increased to ₹5 Lakh (₹5,00,000)

Insurance Cover on Bank FDS, Deposits Increased to ₹5 Lakh (₹5,00,000)

Deposit Insurance is protection to depositors investment make towards bank, the protection is by receiving a premium.

· 2 min read

Background Context

In the current Budget 2020 story, the most recent finance minister Mrs. Nirmala Sitaram has put forward the idea to increase the bar (limit) of insurance cover in the unfortunate situation of bank failure on deposit to ₹5 Lakh from the earlier limit of ₹1 Lakh. This proposal or proposed amendment came in wake of the PMC bank crisis.

Certificate of motor insurance and policy with car and dollar bills.
Photo by Vlad Deep / Unsplash

What exactly is deposit insurance? and How it is regulated in India?

Deposit Insurance is protection for depositors' investments made towards banks, the protection is by receiving a premium.

  • Firstly, the Govt. constituted and established the "Deposit Insurance and Credit Guarantee Corporation (DICGC)" under the shelter of the Reserve Bank of India (RBI), to safeguard the depositors, in case the bank fails.
  • Secondly, to avail of this insurance, the respective bank pays 0.001% of its deposit towards DGICC every year.

What to expect when a bank fails on depositors' money?

  • In case of unfortunate events, such as bank liquidation, insured depositors automatically qualify to receive an assured sum (insurance amount) of ₹1 Lakhs/individual.
  • Depositors to receive this insurance amount from "Deposit Insurance and Credit Guarantee Corporation of India (DICGC).
  • Insurance amount (i.e. ₹1 Lakh) inclusive of principal and interest across depositors' bank accounts (saving, current, as well as recurring deposits held in a bank, if any).

How Depositors can Claim the Money from Failed Banks?

DICGC is not directly involved with the depositors and their investments.

  • Event of Bank Liquidation: An event of "Bank Liquidation" will trigger the RBI to appoint a set of official liquidators to observe the liquidation process and ensure depositors get paid the insurance amount.
  • On Bank Side:  Initially, the liquidators are supposed to produce the entire list of insured depositors and their investment to DICGC within the first three months of RBI taking charge of the liquidation process.
  • Role of DICGC: After receiving the list of insured depositors from the bank undergoing the winding-up and liquidation process, the DICGC is expected to pay the insured amount within two months of receiving the list. These moves of insuring the bank depositors will ensure people continue to make regular deposits and investments in their bank of choice. Earlier in the Fiscal Year 2019, DICGC took around 1,425 days to settle the first claim, which came from a de-registered bank.
    Who is insured by the DICGC? The "Deposit Insurance and Credit Guarantee Corporation of India" guarantee the coverage of all commercial and cooperative banks, except in Lakshadweep, Dadra, Nagar Haveli, Meghalaya, Chandigarh. Primary cooperative societies are not covered under DICGC.

List of Deposits not covered by the DICGC

  • Deposits made by the overseas/foreign Government.
  • Deposits are made by the State and Central Governments.
  • Inter-Bank deposits
  • Deposits and Investment State Land Development Bank with the State Co-Operative Bank.
  • Any amount due on the respective account of any respective deposit collected outside of India.
  • Amount especially exempt or waived by DICGC with earlier approval from RBI.