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Explained: All you need to know about hike in bank deposit insurance

Bank depositor insurance hiked: Why has the government decided to hike bank deposit insurance? What is the role of DICGC? What impact will the hike in bank deposit insurance have on banks? We explain.

Written by George Mathew | Mumbai |
Updated: February 5, 2020 12:45:52 pm
Finance Minister Nirmala Sitharaman announced in her Budget speech that the government proposes to hike depositor insurance from Rs 1 lakh to Rs 5 lakh.

The government, in the Union Budget tabled on Saturday, proposed to increase the insurance cover on bank deposits from Rs 1 lakh to Rs 5 lakh. The proposal is expected to instill more confidence and trust of the public in the banking system, leading to a rise in savings by depositors.

What led to the hike?

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leading cooperative bank headquartered in Mumbai with deposits of over Rs 11,000 crore, appointed an administrator and superseded its board of directors, sending shock waves among thousands of its depositors.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, leading to widespread protests.

What is the role of DICGC?

The Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the RBI, gives insurance cover up to Rs one lakh deposits in banks. Banks will now insure deposits up to Rs 5 lakh per customer with the DICGC as per the Budget proposal. It has surplus funds of Rs 87,995 crore as of March 2019, according to the Annual Report of the Corporation. It reported Rs 152 crore worth of claims in 2018-19 as against Rs 183 crore in the previous year.

What will depositors get?

When a bank collapses, depositors will get Rs 5 lakh from the Corporation. However, now depositors holding more than Rs 5 lakh in their account have no legal remedy in case of the collapse of the bank. Once the Budget is passed by the Parliament, irrespective of the deposit amount, be it Rs 25 lakh or Rs 5 crore, the depositor will get only Rs five lakh if a bank collapses.

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What will be the impact on banks?

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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