Deposit insurance demystified: Exploring the future of bank deposit safety

After the blowout at the Mumbai-based New India Cooperative Bank, the spotlight is once again on bank deposit insurance.

M Nagaraju, Secretary, Department of Financial Services, has said this coverage is under review. Some speculation suggests a hike to ₹15 lakh may be in the offing from the current ₹5 lakh. However, not many are familiar with the finer aspects of deposit insurance, and even fewer understand the role of the executing agency, the Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the Reserve Bank of India (RBI). 

For instance, the bank deposit insurance limit of ₹5 lakh is inclusive of both the principal and the accrued interest. This means that if the principal amount was ₹5 lakh, that is all you will receive if a bank collapses — not the interest component. Banks also have the right to set off their dues from the insured deposit sum payable to you. 

From a risk perspective, it is better to spread your deposits across multiple banks, given the extent of the current deposit cover. Similarly, if joint accounts are held in the same bank in different order, then for each account, the insurance cover will be available separately, up to ₹5 lakh per joint account where the names appear in a different sequence, points out Ravi Bhadani, partner at SNG & Partners (insurance and funds practice). 

These blind spots have implications for investors, especially those who have parked their savings primarily in bank deposits.

The working of DICGC DICGC was formed via the merger of the Deposit Insurance Corporation (DIC) and the Credit Guarantee Corporation of India (CGCI). It was initially set up to cater to the credit needs of weaker sections engaged in non-industrial activities by providing guarantees for such exposures. The two entities were merged to form DICGC on July 15, 1978. As no credit institution was participating in any of the credit guarantee schemes administered by the Corporation, the scheme was discontinued in April 2003, and deposit insurance remains the principal function of DICGC today. 

The Corporation collects insurance premiums from banks — participation is mandatory — based on their assessable deposits. Insured banks pay this premium in advance on a semi-annual basis within two months from the start of a financial half-year, based on their deposits at the end of the previous half-year. The premium paid by the insured banks is required to be borne by the banks themselves and is not passed on to depositors. 

How do banks settle with DICGC for payouts to depositors after a crisis? They are required to repay the amounts from proceeds realised from their assets and other funds, after deducting expenses. DICGC, with the approval of its Board, can defer or modify the repayment period. Currently, the repayment is to be made in five annual installments. In case of a delay, DICGC is entitled to charge a penal interest of two per cent over the repo rate. 

The premium collected from banks goes into the Deposit Insurance Fund (DIF). As of now, a flat premium of 0.12 per cent per annum is levied — that is, 12 paise for every ₹100 of assessable deposits. A big change may be on the horizon: Linking the deposit insurance premium to the risks posed by a bank. This was highlighted by Swaminathan J, deputy governor of RBI, at the International Conference of the International Association of Deposit Insurers: Asia Pacific Regional Committee on August 14, 2024. He held that by tying insurance premiums to the level of risk posed by individual financial institutions, deposit insurers could incentivise banks to adopt stronger risk manage-ment practices. “This approach not only enhances the overall stability of the financial system but also ensures that institutions with higher risk profiles contribute more to the insurance fund,” he said. 

The total premium received by DICGC in FY24 stood at ₹23,879 crore, with commercial banks contri-buting 94.4 per cent and cooperative banks making up the remainder. The DIF stood at ₹1,98,753 crore in FY24; premium revenue contributed 63 per cent of pre-tax accretion, with interest from investments accounting for the rest. On the investment side, DICGC parks its funds in government securities. Interest income rose to ₹13,947 crore in FY24 from ₹11,908 crore in FY23. 

“There needs to be more awareness of deposit insurance; there has to be a campaign for this, and banks, DICGC, and the banking regulator must take an active interest,” said CH Venkatachalam, general secretary, All India Bank Employees Association. 

The Corporation acknowledges the need for greater awareness. In its annual report for FY24, it says the challenge of identifying the target audience for deposit insurance has been recognised. It differentiates areas with low deposit mobilisation — both in terms of the number of accounts and deposit amounts — from those with significant or reasonable deposit mobilisation. 

The Corporation aims to ensure quick dissemination of relevant information to the targeted audience through innovative measures, and help mitigate the spread of misinformation from unreliable sources.