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

What is deposit insurance?

Deposit insurance is a protection cover available for bank depositors if the bank fails financially and go for liquidation.

In India, the deposit insurance activity is done by an RBI subsidiary called Deposit Insurance Corporation.

All types of deposits like savings deposits, term deposits and RDs are covered by DICGC. Some selected deposits especially by institutions are not covered. Deposits of all banks (except primary cooperative societies) up to Rs 5 lakh is covered.

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 later period, several central banks set up deposit insurance institutions especially after 1960s. According to the International Association of Deposit Insurance (IADI) as of January 1, 2020, 145 countries have deposit insurance schemes.

Deposit Insurance in India

In India, the deposit insurance was started with the launch of the Deposit Insurance Corporation and Credit Guarantee Corporation (DICGC) of India in 1961.

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 5 lakh. This change was made under buget 2020.

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 PSBs, Private Sector Banks, Regional Rural Banks, Local Area Banks, branches of foreign banks functioning in India, Small Finance Banks and Payment Banks.
  2. All Co-operative Banks: State Cooperative Banks, Central Cooperative banks, UCBs or Primary Cooperative Banks (Urban Coopera-tive banks are also called as Primary Cooperative Banks). (Deposits of Primary Cooperative Credit Societies are not covered under Deposit Insurance).

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. NBFCs are also not covered under deposit insurance.

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.

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