Insurance cover on bank deposits: Why government is in no mood to raise limit to Rs 15 lakh

By: | Updated: December 14, 2018 12:00 PM

The central government has turned down the suggestions to raise insurance cover on bank deposits to Rs 15 lakh from the current Rs 1 lakh.

Recently, Andhra Pradesh had suggested the government to hike this cover limit.

The central government has turned down the suggestions to raise insurance cover on bank deposits to Rs 15 lakh from the current Rs 1 lakh. This comes amid demands of hiking the insurance cover that is considered too small for the depositors in case of a bank failure. It was last in the year 1993 that the insurance cover was increased to Rs 1 lakh per depositor per bank from Rs 30,000 under the Deposit Insurance and Credit Guarantee Corporation (DICGC).

Recently, Andhra Pradesh had suggested the government to hike this cover limit.  However, the central government turned down the offer. Currently, these is no proposal to revisit this limit, Shiv Pratap Shukla, Minister of State in the finance ministry informed Parliament earlier this month. He also said that the insurance cover limit should be limited, credible and cover the vast majority of depositors but leave the substantial amount of deposits exposed to market discipline.

DICGC, that covers all commercial banks, local area banks, co-operative banks and regional rural banks and branches of foreign banks in the country pays a maximum amount of Rs 1 lakh as the maximum insurance to each depositor per bank.

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The insured banks completely bear the deposit insurance cost and premium of Rs 10 paise per annum per Rs 100 of deposits is paid by them. The depositor doesn’t pay any premium to get the cover.

It is being expected that any hike in insurance cover on bank deposits may affect disproportionately the larger and the stronger banks. These lenders may,as a  result, have to bear higher premium and cross-subsidise smaller and weaker banks which faces relatively higher prospects to fail.

It was in 2002 that the last time a deposit insurance claim was settled with respect to a commercial bank. Each year, DICGC has been compensating bank depositors for cooperative banks  failure.

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