All you wanted to know about the new changes in deposit insurance

Last week the Deposit Insurance and Credit Guarantee Corporation (Amendment) Bill 2021 was passed by both the houses of the Parliament. In the wake of the PMC Bank and YES Bank debacles, these amendments are a move in the right direction. In light of the proposed changes, we help you understand how deposit insurance works.

The bill, which is pending until it gets the President’s assent, proposes to change the time at which the DICGC becomes liable to pay the bank depositors. Earlier the liability kicked in only when the order of liquidation was passed against a bank.

Now the DICGC is liable to pay depositors when any direction, order or scheme is passed such that it prohibits the depositors of the insured bank from accessing their deposits. The DICGC is required to pay the depositors the insured amount (of up to ₹5 lakh – inclusive of principal and interest) within 90 days from which such order/direction/ prohibition takes effect. Once, the bill is enacted into law, depositors of the crisis hit PMC Bank will also be automatically covered.

Earlier, the DICGC was required to settle dues to the liquidator, who in turn would ensure the distribution to each depositor. Now, per the amendment, DICGC is required to pay the depositors either directly, or get the amount credited in the account of the depositors through the insured bank.

Depositors are not required to pay anything. Banks pay DICGC a premium of up to 15 paise per ₹100 of deposits with them, every year. An amendment has also been proposed to permit DICGC to hike the maximum limit of the premium to be collected from time to time with the prior approval of the RBI.

No primary co-operative societies are not. However, all commercial banks (including branches of foreign banks functioning in India, local area banks and regional rural banks) all state, central and primary cooperative banks (which are known as urban cooperative banks) are insured by the DICGC.

Each depositor in a bank is insured for up to a maximum of ₹5 lakh (hiked from the earlier ₹1 lakh in the 2020 Budget) for both principal and interest amount held by him/her in the same right and same capacity. This means that all accounts (savings, current, fixed and/or recurring deposit accounts) held by the depositor in all branches of the bank in her individual capacity will be aggregated. The insurance cover is available for up to a maximum of ₹5 lakh.

However, if the depositor opens other deposit accounts in her capacity as a partner of a firm, or guardian of a minor, or director of a company, or trustee of a trust, or a joint account, in one or more branches of the bank, then such accounts are considered as held in a different capacity and different right. Such deposits will hence enjoy the insurance cover of up to ₹5 lakh each.

If multiple accounts are jointly held by individuals in a bank in which their names appear in the exact same order, then these are considered to be held in the same capacity and in the same right. Hence these shall be aggregated for the purposes of the ₹5 lakh insurance limit.

Depositors are hence better off in changing their order of names, while holding multiple joint accounts in the same bank. These will be treated as held in different capacity and different right. Accordingly, insurance cover will be available separately up to ₹5 lakh for every such joint account where the names appear in different order or where the names are different.

Say, you wish to open multiple joint accounts with your spouse in the same bank, it would be wise to name her / him as the first holder in at least one of the accounts. You can also consider adding another family member as the third joint account holder to maximise your safety net under the deposit insurance.

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