Government Likely to Raise Deposit Insurance to ₹8-12 Lakh by February-End

The central government is expected to significantly enhance the insurance coverage on bank deposits, increasing the limit to between ₹8-12 lakh from the existing ₹5 lakh by the end of this month, according to sources familiar with the matter, as reported by Moneycontrol.

During a post-budget discussion, Financial Services Secretary M. Nagaraju confirmed that the government was actively considering revising the deposit insurance ceiling to offer greater financial security to depositors. The proposed revision is seen as a critical step in reinforcing confidence in the banking system, especially after recent concerns about financial instability in certain cooperative banks.

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Why the Increase in Deposit Insurance is Important

The expected rise in deposit insurance comes at a time when regulatory scrutiny over cooperative banks has intensified. A prime example is the case of New India Co-operative Bank, which recently came under the Reserve Bank of India’s (RBI) radar for financial irregularities. The RBI took swift action by superseding the bank’s board and appointing an administrator after uncovering a ₹122 crore fraud. This led to the arrest of the bank’s General Manager and an accomplice, both of whom are currently in custody until February 21.

In response to the situation, the central bank imposed strict restrictions on the cooperative bank, preventing it from issuing new loans and suspending deposit withdrawals. This has left many depositors in uncertainty, highlighting the urgent need for higher insurance coverage to protect customers in case of a financial crisis.

The move to raise deposit insurance is part of a broader effort by the government and financial regulators to enhance financial stability and safeguard public savings. In the past, banking crises have caused significant distress to depositors, making it necessary to implement stronger safety measures.

Understanding Deposit Insurance and Its Role

Deposit insurance is a financial protection mechanism designed to safeguard bank customers in case their financial institution is unable to return their money. It applies to different types of deposits, including savings accounts, fixed deposits, current accounts, and recurring deposits. However, certain deposits, such as those belonging to foreign governments, central or state governments, and inter-bank deposits, are not covered under this scheme.

Currently, the maximum insurance coverage for depositors in India is ₹5 lakh per depositor per bank. If a person has deposits in multiple banks, the insurance limit is applied separately to each bank, ensuring broader protection across different financial institutions.

The Deposit Insurance and Credit Guarantee Corporation (DICGC), a fully-owned subsidiary of the RBI, is responsible for administering this insurance scheme. It provides protection to depositors of commercial banks, regional rural banks, local area banks, and cooperative banks. The premium for deposit insurance is paid by banks, making it a cost-free security measure for depositors.

Global Comparison of Deposit Insurance

Many countries have adopted deposit insurance policies to enhance public trust in the banking system. Nations like Mexico, Turkey, and Japan provide 100% insurance coverage on bank deposits, ensuring that depositors do not suffer any losses in case of bank failures. In contrast, India’s current coverage of ₹5 lakh, though recently increased from ₹1 lakh in 2020, is still relatively low compared to global standards.

The United States was the first country to introduce an explicit deposit insurance scheme in 1934, following the Great Depression, when widespread bank failures caused massive losses to depositors. The Federal Deposit Insurance Corporation (FDIC) was established to restore public confidence in the banking system. Today, the FDIC insures deposits up to $250,000 per depositor per bank.

The Future of Deposit Insurance in India

With banking reforms and regulatory measures being strengthened, India is likely to see further developments in deposit insurance policies. The anticipated increase in coverage will provide greater financial security to depositors, ensuring that their hard-earned money remains protected even in times of banking distress.

The government’s move to raise deposit insurance is expected to benefit millions of depositors, particularly those in rural and semi-urban areas who rely on small and medium-sized banks for their financial needs. As cooperative banks continue to face challenges, higher insurance coverage will act as a safety net, preventing panic among depositors during financial instability.

While the exact date of implementation is yet to be announced, financial experts believe that the increase in deposit insurance will have a positive impact on banking confidence, making India’s financial system more resilient in the long run.