In a major relief for term and savings account depositors in banks, the Reserve Bank of India (RBI) is reportedly mulling raising the deposit insurance limit from the present level of Rs 5 lakh. The decision on raising this insurance limit, provided by the Deposit Insurance and Credit Guarantee Corporation (DICGC) under the RBI, is expected to be taken soon, according to a report published in Business Standard.
The DICGC insures all deposits such as savings, fixed, current, recurring, and more up to a maximum of Rs 5 lakh for both principal and interest amount held by customers with commercial and cooperative banks.
The deposits kept in different branches of a bank are aggregated for the purpose of insurance cover, and a maximum amount of up to Rs 5 lakh is paid. However, if the funds are in different types of ownership or are deposited into separate banks they would then be separately insured.
Imagine that you have deposited all your life’s earnings in a bank. You are old and retired, and your only source of income is the money deposited in the bank. And one day, the news comes that the bank in which you have deposited the money has gone bankrupt. The panic that you will have in such a situation can only be felt by someone who has gone through this phase.
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In such situations, depositors get a ray of hope – DICGC, i.e., Deposit Insurance and Credit Guarantee Corporation, which provides insurance on deposits in banks. But this insurance is limited to Rs 5 lakh, and this limit is now under question.
What is the DICGC, and why is it necessary?
DICGC’s purpose is that if a bank closes down or goes bankrupt, the depositor can get back their deposit amount (currently up to a maximum of Rs 5 lakh).
Replying to a query around this matter, Nirmala Sitharaman in Parliament said during the budget session this year that any decision in this regard will be taken considering the financial position of the DICGC and the entire banking system. The FM was asked by a member if the government was planning to increase the deposit insurance limit to Rs 50 lakh under the DICGC.
Why it is necessary to increase the insurance limit for deposits in banks
- PMC Bank Crisis:
In 2019, when the RBI imposed restrictions on Punjab & Maharashtra Co-operative Bank (PMC), many depositors got upset. Some of them had deposits worth lakhs of rupees, but they only got insurance protection of up to Rs 5 lakh.
- Yes Bank case:
During the Yes Bank crisis, even though the government and RBI handled the situation, if this had not happened, a large amount of customers could have been in danger.
- Lakshmi Sahakari Bank and other local cooperative banks:
There have been many cases of small cooperative banks collapsing where customers had to struggle for their money for years.
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Why is it necessary to increase the limit?
Rs 5 lakh is insufficient in the era of inflation and high deposits: In today’s time, the FD of a common middle class family is above Rs 10 lakh. In such a situation, the limit of Rs 5 lakh does not cause relief, but fear.
Security to rural and elderly depositors:
The elderly and people of small towns are most dependent on banks. For them, the deposit amount is a lifetime income.
Customer confidence will increase:
When the government increases the insurance limit, it sends a message that your money is safe and this also strengthens people’s trust in the banking system.
What will be the effect?
If the limit is increased to Rs 10 lakh or Rs 15 lakh: Most ordinary depositors will be fully covered. Customers’ fear of cooperative banks will reduce. Insurance premium cost of banks will increase, but customer safety is paramount.
Summing up…
This is a necessary and timely step to protect customers in the banking sector. The incidents of PMC and other banks have made it clear that limited insurance cover is not enough for the financial security of people.
If the government increases this insurance limit, it will act as a safety net for millions of customers and prove that the government gives priority to public interest.