What is Deposit Insurance? How deposit insurance is made in India?

Protecting the deposits made by people in banks is very important to ensure confidence in the banking system. In Most countries, there are arrangements to protect the money deposited by the depositors. The common form of providing safety to depositors is deposit insurance. Deposit insurance is providing insurance protection to the depositor’s money by receiving a premium.

Here, when the bank fails, the depositors will get back their money. Insurance to deposits will be provided up to a limit. For getting the deposit insurance protection, the depositors should pay an insurance premium.

The first deposit insurance scheme was the Federal Deposit Insurance Corporation (FDIC), launched in the US during the Great Depression period when many banks failed and depositors lost their money. The FDIC was established in 1933 to restore public confidence in the US financial system and to protect small depositors.

In the later period, many central banks have set up deposit insurance institutions especially after 1960s. According to the International Association of Deposit Insurance (IADI) as of January 1, 2015, 113 countries have deposit insurance schemes.

Deposit Insurance in India

Deposit insurance has its origin in one of the biggest bank failures in India during the early 1960s. “Serious thought to the concept was, however, given by the Reserve Bank of India and the Central Government after the crash of the Palai Central Bank Ltd., and the Laxmi Bank Ltd in 1960.” –the DICG website says about the developments. Deposit insurance was started with the passing of the Deposit Insurance Corporation Act in1961 and its enforcement on January 1, 1962. Initially, Deposit Insurance Scheme was extended to functioning commercial banks only.

The Deposit Insurance Corporation of India was established in January 1962 after the DIC Act. The DICGC is a wholly owned subsidiary of RBI, is the second oldest deposit insurance system in the world. Later in 1978, the Corporation was also entrusted with the responsibility of credit guarantee and was rechristened as the Deposit Insurance and Credit Guarantee Corporation (DICGC) (source: D Subbarao: Funding of deposit insurance systems, RBI).

DICGC is fully owned by the RBI. Deposit insurance is mandatory for all banks. The premium charged is on a flat rate basis which is 10 paise per Rs 100. The amount of coverage is presently limited to Rs one lakh.

A Deposit Insurance Fund (DIF) is built up from the premium received from insured banks and the coupon received from investment in central government securities.

Deposit insurance extended by DICGC covers all commercial banks, including Local Area Banks (LABs) and Regional Rural Banks (RRBs) in all the States and Union Territories (UTs). All Co-operative Banks across the country except three UTs of Lakshadweep, Chandigarh, and Dadra and Nagar Haveli are also covered by deposit insurance.

In the event of a bank failure, DICGC protects bank deposits that are payable in India. The DICGC insures all deposits such as savings, fixed, current, recurring, etc.

Institutions covered under deposit insurance

  1. All commercial banks including branches of foreign banks functioning in India, local area banks and regional rural banks.
  2. All Co-operative Banks across the country - State, Central and Primary cooperative banks, and urban cooperative banks.

But those in three UTs of Lakshadweep, Chandigarh, and Dadra and Nagar Haveli are not covered by deposit insurance. Primary cooperative societies are not insured by the DICGC.

What types of deposits are not insured by the DICGC?

The following types of deposits are not covered under deposit insurance by DICGC

(i) Deposits of foreign Governments;

(ii) Deposits of Central/State Governments

(iii) Inter-bank deposits;

(iv) Deposits of the State Land Development Banks with the State co-operative bank;

(v) Any amount due on account of any deposit received outside India

(vi) Any amount, which has been specifically exempted by the corporation with the previous approval of Reserve Bank of India.

The operation of deposit insurance is going to be shifted to Resolution Corporation with the passing of the Financial Resolution and Deposit Insurance Bill which was introduced in the Parliament in August 2017.