Deposit insurance and the Deposit Insurance and Credit Guarantee Corporation (DICGC) are crucial features of the Indian banking sector. Recently, the Prime Minister announced that Rs 1,300 crore had been distributed to over 100,000 depositors who were unable to access their funds due to financial difficulties faced by their banks. These deposits were insured under the DICGC Act, which effectively covers approximately 98% of bank accounts, translating to a value of Rs 76 lakh crore. This announcement follows the Union Cabinet’s approval of the Deposit Insurance and Credit Guarantee Corporation (DICGC) Bill in 2021.
A Look at Deposit Insurance and Credit Guarantee
Deposit insurance serves as a safety net for bank depositors if a bank fails financially. In such a situation, depositors risk losing their money if the bank must go into liquidation. Meanwhile, a credit guarantee provides a specific remedy for creditors if their debtors default on their debts.
Details and Limitations of Deposit Insurance
Deposit insurance is currently capped at Rs 5 lakh per account. This means that if a bank collapses, a depositor can only claim up to Rs 5 lakh, regardless of the total amount deposited. The premium for this insurance has increased from 10 paise per Rs 100 deposit to 12 paise, with a maximum limit of 15 paise. The banks shoulder these premiums, paying them semi-annually to the DICGC based on their deposits from the previous half-year.
Banks Covered and Types of Deposits Insured by DICGC
Numerous banks, including regional rural banks, local area banks, foreign banks operating in India, and cooperative banks, are mandated to secure deposit insurance with the DICGC. The corporation insures all types of bank deposits, notwithstanding certain exceptions such as foreign government deposits, inter-bank deposits, deposits of the State Land Development Banks with state cooperative banks, and any deposit received outside India.
The Imperative for Deposit Insurance
The critical need for deposit insurance has been underscored by recent banking issues where depositors struggled to access their funds. Instances involving the Punjab & Maharashtra Co-operative (PMC) Bank, Yes Bank, and Lakshmi Vilas Bank have intensified discussions surrounding deposit insurance, highlighting its significance in safeguarding depositor’s interests.
About DICGC and its Functioning
Established in 1978, the DICGC emerged from the amalgamation of the Deposit Insurance Corporation (DIC) and the Credit Guarantee Corporation of India Ltd. (CGCI). The corporation is entirely owned by the Reserve Bank of India (RBI) and operates under its purview. It functions as a deposit insurance and credit guarantee provider for Indian banks. To fulfill its responsibilities, the DICGC maintains three types of funds – Deposit Insurance Fund, Credit Guarantee Fund, and General Fund. The initial two are funded by the insurance premiums and guarantee fees received, while the General Fund meets the corporation’s administrative expenses.
