Centre not to hike insurance cover of Rs 100,000 for bank deposits

Andhra Pradesh Chief Minister Chandrababu Naidu suggested an increase in deposit insurance cover to Rs 1.5 million in a letter to then finance minister Arun Jaitley in May

The Union government has no plans to increase the existing insurance cover of Rs 100,000 for bank deposits. The Centre has turned down a request from Andhra Pradesh Chief Minister Chandrababu Naidu who suggested an increase in deposit insurance cover to Rs 1.5 million in a letter to then finance minister Arun Jaitley in May.

At present, all deposits up to Rs 100,000 are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC).

The finance ministry examined Naidu’s proposal after consulting the DICGC, a subsidiary of the Reserve Bank of India (RBI) that guarantees depositors’ money. The ministry felt that the current limit was in line with international standards, according to which at least 80 per cent of depositors and 20-30 per cent of deposits amount should be insured.

“As per the Core Principle (CP) 8 of Effective Deposit Insurance prescribed by the International Association for Deposit Insurance (IADI), coverage should be limited, credible and cover the vast majority of depositors but leave a substantial amount of deposits exposed to market discipline,” the DICGC informed the ministry.

As on March 31, 92 per cent accounts and 29 per cent deposits in terms of value were insured by the DICGC, the latest data showed. This was higher than the guidance provided by the IADI.

“An increase in the insurance cover also requires a higher premium based on risk classification of the insured bank,” according to the finance ministry. Naidu, however, recommended ensuring that the higher premium amount, as a result of the insurance limit hike, was borne by banks and the charges were not passed on to customers.

The deposit insurance covers all commercial banks, local area banks, regional rural banks and co-operative banks. In case a bank fails, the DICGC pays the insured amount to the depositor.

The insurance cover for bank deposits was last revised in May 1993 to Rs 100,000 from Rs 30,000 earlier, after a gap of 13 years. In March 1993, 95.80 per cent bank accounts and 67.30 per cent bank deposits in value terms were insured.

Jaitley said in January that the government was open to the idea of raising the deposit insurance limit from Rs 100,000.