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Union Budget 2020: Rs 5 lakh insurance in case bank goes bust; cover hiked from Rs 1 lakh now

The government move is expected to instill confidence among depositors as the proposal will increase the safety of the money deposited in banks. The bank deposits are insured under the Deposit Insurance and Credit Guarantee Corporation Act.

Written by George Mathew | Mumbai | Updated: February 2, 2020 12:18:31 pm
Budget 2020, Nirmala Sitharaman Budget 2020, Budget 2020 Sensex, insurance in case bank goes bust, Sensex Nifty Budget, Indian Economy Budget 2020, Economic slowdown budget, India gdp grwoth budget, Budget news, Indian Express According to State Bank of India Chairman Rajnish Kumar, the increase in deposit insurance limit from existing Rs one lakh to Rs 5 lakh was necessary. (File photo)

In a major relief to bank depositors, the government has proposed to increase deposit insurance cover from Rs 1 lakh to Rs 5 lakh.

The government move is expected to instill confidence among depositors as the proposal will increase the safety of the money deposited in banks. The bank deposits are insured under the Deposit Insurance and Credit Guarantee Corporation Act. After the collapse of Punjab and Maharashtra Co-operative Bank, there has been a demand from several quarters that the DICGC, the RBI subsidiary that gives insurance cover to bank deposits up to Rs one lakh, should hike the coverage cap.

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According to State Bank of India Chairman Rajnish Kumar, the increase in deposit insurance limit from existing Rs one lakh to Rs 5 lakh was necessary. “The hike in deposit insurance cover to Rs 5 lakh could boost the confidence in the banking sector,” said K. Paul Thomas, MD, ESAF Small Finance Bank.

Bankers said the proposal is also likely to support the deposit accretion of banks. “However, given the size of insured deposits is likely to increase, the deposit insurance premium paid by banks will increase the operating expenses of banks and will be negative for their profitability to the extent they are not able to pass it on to the bank customers. “As on March 31, 2019, 28 per cent of deposits (in value terms) and 92 per cent of depositors (in terms of number of accounts) were covered by deposit insurance, which is likely to increase to 40-50 per cent, said Karthik Srinivasan, Group Head, Financial Sector Ratings, ICRA Ltd.

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What led to the hike in deposit insurance cover? In September 2019, the Reserve Bank of India (RBI) slapped curbs on Punjab and Maharashtra Cooperative Bank Ltd (PMC Bank), a leading cooperative bank headquartered in Mumbai, appointed an administrator and superseded its board of directors, sending shock waves among thousands of its depositors. Panic-stricken customers rushed to bank’s branches across the state and were unable to withdraw more than Rs 1,000. Irrespective of the deposit amount, be it Rs 25 lakh or Rs 5 crore, the depositor was supposed to get only Rs one lakh if a bank collapsed. Now it will be raised to Rs 5 lakh. However, now depositors holding more than Rs 5 lakh in their account have no legal remedy in case of the collapse of the bank.

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The Damodaran panel set up by the RBI had recommended that the deposit insurance cover provided by DICGC should be raised to Rs 5 lakh so as to encourage individuals to keep all their deposits in a bank convenient for them.

While DICGC has a surplus of Rs 87,995 crore, SBI, India’s largest bank, has over Rs 30 lakh crore deposits. PMC Bank which collapsed earlier this year has over Rs 11,000 crore deposits. If the insurance cover cap is hiked from Rs 1 lakh, the premium to be paid by the banks may also go up, bankers say.

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While Rs 12,043 crore was the premium income collected by DICGC in 2018-19 against Rs 11,128 crore a year ago, Rs 152 crore was the claim in 2018-19 as against Rs 183 crore in the previous year. The total insured deposits were Rs 33,70,000 crore as of March 2019.

Protecting depositors

# The government move is expected to instill confidence among depositors as the proposal will increase the safety of the money deposited in banks

# The bank deposits are insured under the Deposit Insurance and Credit Guarantee Corporation Act. After the collapse of Punjab and Maharashtra Co-operative Bank, there has been a demand from several quarters that the DICGC, an RBI subsidiary

# As per SBI Chairman Rajnish Kumar, the hike was necessary

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