There has been an ongoing debate regarding the inadequacy of insurance against deposits made by customers in Indian banks. This discussion was reignited following the recent failure of the Punjab and Maharashtra Co-operative (PMC) Bank. According to current rules, should a bank collapse, a depositor may claim up to a maximum of ₹1 lakh per account as insurance cover, regardless of the total deposit being more than ₹1 lakh. This protection is known as deposit insurance and is provided by the Deposit Insurance and Credit Guarantee Corporation (DICGC). This topic of depositor safety also came under the spotlight when the Financial Resolution and Deposit Insurance (FRDI) Bill was proposed in Parliament in 2017.
Controversy Regarding the FRDI Bill
The controversy surrounding the FRDI Bill arose from its suggestion that bank depositors bear a portion of the cost related to the resolution of a failed bank. This led many to question the extent of security provided to depositors and the potential financial implications they might face.
Establishment and Role of the DICGC
The DICGC was established in 1978 following the amalgamation of the Deposit Insurance Corporation (DIC) and the Credit Guarantee Corporation of India Ltd. (CGCI). This followed the enactment of the Deposit Insurance and Credit Guarantee Corporation Act, 1961 by the Parliament. The DICGC serves as a provider of deposit insurance and credit guarantees for Indian banks and operates as a fully owned subsidiary of the Reserve Bank of India. The DICGC imposes a charge of 10 paise for every ₹100 deposit held by a bank. This premium paid to the corporation is borne by the bank and is not passed on to depositors.
| Year | Deposit Insurance Cover |
|---|---|
| 1980 | ₹30,000 |
| 1993 | ₹1 lakh |
Low Protection Cover for Depositors in Indian Banks
Compared to global standards, deposit insurance in India is among the lowest. The last revision of the deposit insurance cover by DICGC took place on May 1, 1993, increasing it from ₹30,000 since 1980 to ₹1 lakh. The Damodaran Committee on ‘Customer Services in Banks’ in 2011 recommended a five-fold increase to ₹5 lakh considering rising income levels and growing individual bank deposits.
Mandatory Deposit Insurance Cover
It’s compulsory for banks, including regional rural banks, local area banks, branches of foreign banks in India, and cooperative banks, to take deposit insurance cover with the DICGC. This mandatory provision ensures that all banks are under the protection of deposit insurance, providing a safety measure to their customers.
