Bank Deposits

News Excerpt:

As of September 2023, only 44% of bank deposits were covered by insurance.

More detail about news:

  • Since 2021, the ratio of secured deposits has been steadily falling.

  • In September 2022, 49% of deposits were insured, down from 50.9% in both September 2021 and 2020, according to RBI data.

Rising Interest Rates

  • With rising interest rates, the value of deposits has increased.
  • From September 2022 to September 2023, the value of insured deposits grew by 3.4% year-on-year.

Importance of Deposit Insurance

  • Deposit insurance protects customers from losing all their money in the event of a bank failure.
  • In India, the Deposit Insurance and Credit Guarantee Corporation (DICGC) provides this insurance.
  • The insurance cover per depositor per bank was increased from ₹1 lakh to ₹5 lakh in February 2020.

Reason behind low insured deposit

  • However, a large portion of deposits remains uncovered because depositors often hold amounts exceeding the maximum insurance coverage of Rs 5 lakh in the same capacity.
  • For example, if anyone has four deposits totaling Rs 15 lakh in a single bank account under the same capacity, only Rs 5 lakh would be insured, leaving Rs 10 lakh without coverage under the deposit insurance scheme.

Decline in Registered Banks

  • The number of banks registered with DICGC for deposit insurance has been decreasing over the past three years.
  • There were 2,058 registered banks in FY21, which fell to 2,040 in FY22, 2,026 in FY23, and further to 1,997 in FY24.
  • This decline is observed across all categories of banks.
  • As of September 2023, rural and cooperative banks had the highest coverage at 82% and 65%, respectively.

Revision of Insurance Cover

  • Analysts suggest that the current insurance cover of ₹5 lakh needs to be revised to keep up with growing deposits and rising inflation.

Global Comparisons

  • In terms of deposits insured relative to per capita GDP, India is comparable to European countries but lags behind the US, China, and Brazil.
  • The RBI Deputy Governor stated that the size of the Deposit Insurance Fund, at a ratio of 2.02% to insured deposits, is in line with the global median.
  • The target is to achieve a ratio of 2.5% by March 2028.

Settlement of Claims

  • During FY24, the DICGC settled claims amounting to ₹1,431.5 crore.
  • Claims are notably higher in cooperative and rural banks, especially in Maharashtra and Gujarat, due to stress in capital adequacy in these banks.

How to maximize insured deposits?

  • To maximize insurance coverage, it is advisable to diversify deposits into different rights and capacities.
  • For instance, joint deposits with each of the family members separately will be treated as a different deposit and enjoy the deposit cover separately.
  • Similarly, accounts held in different capacities, such as an individual account, an account as a company director, or as a guardian of a minor, are treated as separate accounts, allowing each to benefit from the Rs 5 lakh insurance cover.

Deposit Insurance and Credit Guarantee Corporation (DICGC)

  • The functions of the DICGC are governed by the provisions of 'The Deposit Insurance and Credit Guarantee Corporation Act, 1961' (DICGC Act).
  • The authorized capital of the Corporation is 50 crore, which is fully issued and subscribed by the RBI.
  • 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.
    • Co-operative Banks - All eligible co-operative banks as defined in Section 2(gg) of the DICGC Act are covered by the Deposit Insurance Scheme.
  • Under Section 11 of the DICGC Act, 1961, all new commercial banks are required to be registered as soon as may be after they are granted licence by the RBI under Section 22 of the Banking Regulation Act, 1949.
  • Under the provisions of Section 16(1) of the DICGC Act, the insurance cover is limited to 5,00,000/- 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 from 4th February 2020 onwards.
  • The premium paid by the insured banks to the Corporation is required to be absorbed by the banks themselves so that the benefit of deposit insurance protection is made available to the depositors free of cost. 
  • DICGC insures all bank deposits, such as saving, fixed, current, recurring, etc. except the following types of deposits.
    • Deposits of foreign Governments;
    • Deposits of Central/State Governments;
    • Inter-bank deposits
    • Deposits of the State Land Development Banks with the State co-operative banks.
    • Any amount due on account of and deposit received outside India.
    • Any amount, which has been specifically exempted by the corporation with the previous approval of the Reserve Bank of India.

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