Budget to the rescue of bank depositors

The Budget proposes to allow withdrawals to the extent of the deposit insurance cover in troubled banks.

The significant hike in insurance cover for bank deposits — from ₹1 lakh to ₹5 lakh per individual — in last year’s Budget was a big positive for bank depositors.

However, following the unearthing of financial irregularities at Punjab and Maharashtra Cooperative Bank in September 2019, the RBI placed restrictions on withdrawals from the bank. The initial withdrawal limit of ₹1,000 per account was later raised to ₹50,000, and then in June 2020, to ₹1 lakh.

The higher insurance cover of ₹5 lakh did little to come to the depositors’ rescue. This is because the DICGC (Deposit Insurance and Credit Guarantee Corporation) cover kicks in only in case of liquidation and cancellation of a bank’s licence.

Again, when YES Bank was placed under a moratorium in March 2020, a withdrawal limit of ₹50,000 was imposed on the bank’s customers. Likewise, for Lakshmi Vilas Bank — with a sharp deterioration in its financial position — withdrawals from the bank were capped at ₹25,000 in November 2020.

What is covered

All bank deposits including those with private banks, public sector banks, small finance banks and cooperative banks in the country are covered by the DICGC.

The DICGC cover insures both principal and interest up to a maximum of ₹5 lakh deposited with a bank (all branches included).

This includes the money held across savings, current, recurring and fixed deposit accounts by an individual with a particular bank. Deposits with each bank have a separate cover of up to ₹5 lakh.

In the past, depositors have had to bare the brunt of withdrawal limits on money held in their bank accounts. This is set to change with the latest Budget — the Finance Minister has proposed to amend the DICGC Act to ensure that bank depositors get a time-bound access to their deposits to the extent of the insurance cover of ₹5 lakh.

Data from DICGC shows that of a total of 235 crore accounts, 98.3 per cent were protected under the DICGC cover as of March 2020. In terms of deposit amount, of a total of ₹135-lakh crore held by banks during 2019-20, close to 51 per cent was insured.

A suitable amendment to the DICGC Act can safeguard the interests of a majority of bank account holders and at least half the amount deposited across banks.