With depositors worrying about the fate of their deposits after the PMC Bank crisis, the Union Budget 2020 has announced that deposit insurance will be hiked to Rs 5 lakh per depositor per bank from the existing Rs 1 lakh limit set way back in 1993. The announcement assumes significance in the backdrop of numerous instances of different banks becoming the victim of frauds, putting at risk the hard-earned savings of common people.

“..the Deposit Insurance and Credit Guarantee Corporation (DICGC) has been permitted to increase Deposit Insurance Coverage for a depositor, which is now `one lakh to `five lakh per depositor,” Union Finance Minister Nirmala Sitharaman said in her Budget 2020-2021 speech.

Previously, depositors in failed and liquidated banks got only up to Rs 1 lakh as insurance cover, regardless of the amount in their accounts, according to the DICGC — a wholly-owned subsidiary of the Reserve Bank of India. DICGC insures all bank deposits

The enhanced limit of Rs 5 lakh covers savings, fixed, current and recurring accounts. The DICGC covers all commercial banks, including branches of foreign banks functioning in India, local area banks and regional rural banks. All eligible cooperative banks as defined in Section 2(gg) of the DICGC Act are also covered by the deposit insurance scheme.

Experts agreed that the move to hike deposit insurance cover to Rs 5 lakh will boost depositor confidence. “Raising the insurance cover of depositors from Rs 1 lakh to Rs 5 lakh will boost the confidence of depositors. This, in a way, will lead to bigger deposits – and thereby help in increasing liquidity in the banking system,” said Anuj Puri, Chairman – ANAROCK Property Consultants.

The Deposit Insurance (administered by the DIGIC scheme) has so far been outdated and grossly inadequate to attempt to protect the retail investor against financial disasters. Joydeep K Roy, Insurance, Partner & Leader – PwC India said: “The amount of Rs 1 lakh may have been large in the 1970s but is hardly adequate to protect even the bottom 20th percentile of the retail fixed deposits in case of a black swan event in banking. Moreover, it was a flat amount, and reserves were not properly actuarially calculated to protect the assurance and was more or less like a Government relief. The five-fold increase, while is a very positive step which will bring relief to probably the majority of small retail depositors in the country, still fails to address the fundamental issue of risk-based benefit and proper reserving.”

Ideally, it should be in the nature of a variable amount proportional to the amount of the deposit, with a deductible which will manage the incremental risk. If this is managed with a Public Private Partnership with some General Insurers with a properly calculated risk based premium, then it will be scientific and will stand the test of time. However if it is just treated as a benefit given by Government in times of disaster, then it can increase the strain on Government reserves in case of a disaster, Roy argued.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at [email protected].

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