Deposit insurance: what you didn’t know

Leading banks have reported big profit declines and even bigger bad loan write-offs this quarter. So, if you are curious to know more about deposit insurance, here’s a look into the workings of the Deposit Insurance and Credit Guarantee Corporation of India (DICGC), an RBI subsidiary.

I know that DICGC covers all bank accounts up to ₹1 lakh per deposit. But what does this insurance not cover?

Deposit insurance covers deposits in all the banks that are licensed to operate by the RBI and registered with DICGC. Today 2,129 banks including commercial banks, foreign banks in India, local area banks, regional rural banks and co-operative banks are covered by deposit insurance. You can check for the list of insured banks at www.dicgc.org.in .

The insurance is restricted to ₹1 lakh per depositor per bank and does not cover any deposits held in excess of this. For calculating this limit, all your accounts held across different branches of the same bank are aggregated.

The ₹1 lakh limit includes both your principal and any accumulated interest in each account. For calculating this limit, all kinds of deposits held by the same person — savings accounts, fixed deposits and current account are added up. Note that by end March 2015, 69 per cent of the total value of deposits held by savers in Indian banks, was not covered by insurance.

How do I ensure that most of my bank deposits are covered?

To ensure maximum deposit coverage, you need to diversify your accounts/deposits across multiple banks, so that the sum in each account does not exceed ₹1 lakh. You can also hold many joint accounts, while making sure that the order of account holders is not the same across accounts.

Have any banks actually gone bust, requiring the DICGC to pay out this insurance claim?

Dozens of them have. The DICGC has been paying out several crores in claims every year towards co-operative banks that have gone into liquidation.

In 2014-15 alone, it settled ₹321 crore in claims towards depositors from 30 co-operative banks. Instances of commercial banks winding up have been far fewer. Since its inception, the DICGC has paid out claims worth ₹4,633 crore towards 328 defunct cooperative banks, and ₹296 crore towards 27 commercial banks that were de-registered or liquidated.

When does the insurance cover kick in? And how does the claims process work?

The DICGC’s insurance cover kicks in when the RBI cancels the licence of any bank and recommends its liquidation to the registrar of co-operative societies (only if it is a co-operative bank).

Once it receives such intimation from the RBI, the DICGC asks for the list of eligible deposits from the official liquidator of the bank. This list is verified by an independent auditor. The liquidator has three months to provide the list of depositors to the DICGC. The DICGC is then required to pay out the claims within two months of this date.

Do depositors get the money directly?

No. DICGC pays the money to the official liquidator or CEO of the sinking bank. What’s more, the bank can deduct any dues owed by you before paying you the money.

Who pays for the insurance cover?

Banks do, from their depositors’ funds. All the banks are required to pay the DICGC an annual premium of 10 paise for every ₹100 worth of deposits they hold. The premium is charged at a flat rate. But there is a debate about whether DICGC should start charging higher premiums to the riskier banks, based on their actual financials. Today, commercial banks (and thus their depositors) foot the bill for much of the premium, but it is cooperative banks which avail most of the claims.

Does DICGC earn enough income to cover its claims?

Yes, more than enough. DICGC earns its annual income from three sources — insurance premium from banks, income from investing its surplus and amounts recovered from selling the assets of banks which have been wound up. . In 2014-15, the corporation raked in a hefty ₹8,229 crore in premium income, ₹4,032 crore from its investments and ₹147 by way of asset recoveries from liquidated banks. As against this, it paid out just ₹321 crore in new claims.

In the last five years, thanks to the flood of money into bank deposits, the premium income for DICGC has more than doubled from ₹4,155 crore (in 2009-10) to ₹8229 crore. But the total claims it paid out have halved from ₹655 crore to ₹321 crore.

What if many banks go belly up at once and it is deluged by claims?

The corporation maintains a Deposit Insurance Fund of ₹50,453 crore to act as a buffer. This amounts to more than ten times the cumulative value of all the claims paid out till date. DICGC also conducts periodic actuarial valuation of its liabilities, to ascertain if this fund is sufficient. It also has a backstop arrangement to borrow from the RBI in a cash crunch. However, the DICGC is obviously not designed to handle a systemic failure, where many insured banks default at the same time. But to be fair, no insurer globally is designed to handle such Black Swan events.

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