Deposit insurance cover for banks revised only five times since 1961

Amid calls for increasing the deposit insurance cover after the crisis at Punjab and Maharasthra Bank, official data show that the cap was hiked more than two decades ago, and this is, in fact, the most extended break in the revision of the cover.

The deposit insurance cover was last hiked with effect from May 1, 1993, to ₹1 lakh from ₹30,000 in July 1980. Before that, the revisions were faster – ₹20,000 from January 1976, and ₹10,000 with effect from April 1970. And before that, a cover of ₹5,000 was provided, effective January 1, 1968. According to the annual report 2018-19 of the Deposit Insurance and Credit Guarantee Corporation, the insurance cover has been revised five times.

Under Section 16 of the DICGC Act 1961, the insurance cover was originally limited to ₹1,500 only per depositor for deposits held by him in “the same capacity and in the same right” at all the branches of a bank taken together.

The Damodaran Committee on Customer Services in Banks, which was set up by the Reserve Bank of India, in its report in 2011 had recommended a five-time increase in the cap to ₹5 lakh due to rising income levels and increasing size of individual bank deposits.

Sick banks

It had also suggested that for sick banks, where the accounts have been frozen, there should be a way to enable the customer avail a part of their insured deposit till the final fate of a sick bank is decided.

Analysts point out that rising inflation has also impacted the value of cover. Average inflation is estimated above 6 per cent till 2014 and then at about 4 per cent. “There has been quite a significant increase in inflation over this time period. So the nominal magnitude of the cover should be increased again to protect the real value of this ₹1 lakh set in 1993,” said DK Srivastava, Chief Policy Adviser, EY India.

A move to this end was planned in the Financial Resolution and Deposit Insurance Bill, which was later junked. “It is not like the government has not been aware of the issue. It has been working on increasing the deposit insurance coverage for some time,” noted a former government official. Finance Minister Nirmala Sitharaman has indicated that the government may now look at reviewing the deposit insurance cover.

Functioning of the scheme

The DICGC last settled a claim in March this year, related to Uttar Pradesh-based Pioneer Urban Co-operative Bank. The RBI had cancelled the licence of the bank in October 2016. It settled main claims of 28,382 depositors for ₹6.85 crore and released ₹3.45 crore.

Last fiscal, it settled aggregate claims worth ₹37 crore for 15 cooperative banks (six main claims and 21 supplementary claims). It took an average 1,425 days in 2018-19 between de-registration of a bank and claim settlement and about 11 days between receipt of a claim and claim settlement. This was 12 days in 2017-18.