Budget 2020 | Deposit insurance cover raised to ₹5 lakh

The first increase in 27 years assumes significance in the wake of the crisis at PMC Bank

Salem, Tamil Nadu 11/11/2016: Story by SMS: People depositing cash in cash deposit machine of State Bank of India in Salem on Friday. Photo: E. Lakshmi Narayanan

The government has decided to increase the insurance cover for bank deposits to ₹5 lakh from ₹1 lakh, Finance Minister Nirmala Sitharaman said in her Budget speech. This is the first time since 1993 that the deposit insurance cover has been raised.

The Finance Minister assured that there was a robust mechanism in place to monitor the health of all Scheduled Commercial Banks and that depositors’ money was safe.

“The Deposit Insurance and Credit Guarantee Corporation (DICGC) has been permitted to increase [the] Deposit Insurance Coverage for a depositor, which is now ₹1 lakh to ₹5 lakh per depositor,” she said.

The clamour for higher cover for bank deposits grew stronger following the Punjab and Maharashtra Cooperative Bank crisis, where depositors are facing restrictions on deposit withdrawals.

The RBI imposed the restrictions following financial irregularities at PMC Bank. At present, the withdrawal from the bank is capped at ₹50,000.

“Raising deposit insurance cover to ₹5 lakh from the current ₹1 lakh is significant and will give a big comfort to depositors,” Shanti Ekambaram, president – Consumer Banking, Kotak Mahindra Bank Ltd., said.

The Deposit Insurance and Credit Guarantee Corporation (DICGC) had proposed to increase the deposit insurance limit to the ₹3-5 lakh range following the crisis at PMC Bank. The DICGC Act will have to be amended to increase the deposit cover. The increase in deposit cover will increase the cost for the banks.

“The increase on deposit insurance to ₹5 lakh will increase bank premia costs to these institutions,” Abizer Diwanji, Partner & Leader Financial Services - EY India, said. The present premium rate is 10 paise for a deposit of ₹100.

The premium paid by the insured banks to the DICGC is required to be borne by the banks themselves and is not passed on to the depositors.

The DICGC insures all bank deposits such as savings, fixed, current and recurring. Deposits not covered by the Corporation include those of foreign governments and of Central/ State governments, deposits of State Land Development Banks with State cooperative banks, inter-bank deposits, deposits received outside India and those specifically exempted by the DICGC with the prior approval of the banking regulator.