Rise in Bank Deposits Insurance Cover to Rs.5 Lakh

RBI Raised Insurance Cover on Bank Deposits to Rs.5 Lakh From Rs.1 Lakh (Effective From Feb 4, 2020)

Introduction

In the Budget 2020, Finance Minister made an announcement regarding the rise in bank deposits insurance cover to Rs.5 Lakh from Rs.1 Lakh with a view of providing greater measure of protection to the depositors. Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly-owned subsidiary of the RBI, provides the insurance cover on the bank deposits.

Rise in Bank Deposit Insurance Cover to Rs.5 Lakh

Announcement of Rise in Insurance Cover on Bank Deposits in Budget 2020

• In Budget 2020, Finance Minister Nirmala Sitharaman had announced that the insurance cover on bank deposits will be increased 5 times to Rs.5 Lakh from current coverage of Rs.1 Lakh.
• The move by the Government is with a view of providing greater measure of protection to the depositors.
• Accordingly, DICGC has increased the limit of insurance cover for depositors in insured banks from present level of Rs.1 Lakh to Rs.5 Lakh per depositor with the effect from Tuesday, 4th February 2020.
• This measure will boost confidence among investors that their money is safe with bank. This is the aftermath of crises at the Punjab and Maharashtra Co-operative Bank.
• Now we will see who provides Insurance Cover, what are the types of deposits on which DICGC provides insurance cover, which are the banks covered under this scheme and what impact will it have on the depositors and banking system.

Who Provides Insurance Cover on Banks Deposits?

• Deposit Insurance and Credit Guarantee Corporation (DICGC), wholly owned subsidiary of RBI, provides insurance for bank deposits.
• All commercial banks (public, private & rural) including branches of foreign banks functioning in India and cooperative banks are insured by the DICGC.
• DICGC insures all types of bank deposits such as savings, fixed, current as well as recurring deposits.
• It does not include :
  1. Deposits of foreign Governments
  2. Deposits of Central/State Governments
  3. Inter-bank deposits
  4. Deposits of the State Land Development Banks with the State co-operative bank
  5. Any amount due on account of and deposit received outside India and any amount which has been specifically exempted by the corporation with the previous approval of Reserve Bank of India
• DICGC insures principal as well as interest amount. In case of bank failure or liquidation, depositors get the insured amount or total amount deposited including interests whichever is lower.
• Since 1993, the deposit insurance cover was static at Rs.1 Lakh. Here is the historical data of limits of insurance cover on bank deposits.

How Banks Keep Your Deposits Safe?

1. All Commercial Banks have to follow the primary prudential norms of RBI.
2. Accordingly, all commercial banks have to keep aside around 22.25% of depositors’ money separately in the form of various reserves.
   • Cash Reserve Ratio (CRR) = 4%
   • Statutory Liquidity Ratio (SLR) = 18.25%
3. In addition, Banks have to maintain about 9% of money lent as capital all the time.
4. In case of stress, RBI puts a bank under prompt corrective action to help it recover.
5. If the situation does not improve RBI often facilitates a merger with a strong bank.
6. When all these measures fail, the deposit insurance of Rs.1 Lakh, Now Rs.5 Lakh, is the last safety net for the depositors.
7. Thus, the insurance cover limit on bank deposits provided by DICGC is always playing a significant role in the protection of depositors.

How the Rise in Insurance Cover Limit Would Affect Banks?

• Currently, all the insured banks pay a premium of Rs.10 for every Rs.10,000 of deposits insured by DICGC. The premium was increased from Rs.8 to Rs.10 in April 2005.
• As per the RBI’s statement, DICGC has increased the limit of insurance cover for depositors in insured banks from present level of Rs.1 Lakh to Rs.5 Lakh per depositor with the effect from Tuesday, 4th February 2020.
• On account of insurance cover stands increased, the banks will pay a premium of Rs.12 as against Rs.10 for every Rs.10,000 deposit.
• According to the report by Credit Suisse, the estimated increase in insurance premium would be around Rs.28,000 Cr in the overall banking system.
• The increase in insurance limit will increase the operating expenses of the banks as they will have to pay more insurance premium. This, in turn, will impact the profitability of banks.
• As per banking sources, it will affect the bottom-line of the banks ie. Net Profit by around 0.5-2%.
• Impact will be more on the large commercial banks with the larger deposits base as the entire banking sector has to pay more insurance premium.

Conclusion

• Overall, the rise in insurance cover limit is expected to increase confidence in banks and depositors would now keep large amounts of money in banks.
• Now, the banks would be viewed as much safer options to park money. Even though the profitability of banks would get hurt, this would definitely give security and comfort to the retail investors.