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India’s Bank Deposit Insurance Is The Lowest In The World Says Report; Why Is It Significant?

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In a research report by the State Bank of India (SBI) released on Monday, the public-sector bank said that the protection provided for bank deposits made in India through insurance cover is among the lowest in the world. Our bank accounts are insured for up to Rs 1 lakh (or $1,508) only, which means that if your bank's business closes, you are likely to not receive more than Rs 1 lakh.

India’s Bank Deposit Insurance Lowest In The World; Why Is It Significant?
 

What is deposit insurance and why has it caught attention again?

Insurance policies protect against unexpected events. In the case of a bank, deposit insurance will protect the deposits made by customers if the bank has a financial failure and has to be liquidated. This insurance assures that at the time of liquidation, the bank pays depositors before other parties.

In the light of the Punjab & Maharashtra Cooperative Bank (PMC) crisis, the need to increase the existing Rs 1 lakh cover has become urgent.

  • At present, the Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the RBI, insures all types of bank deposits made at commercial banks and foreign banks operating in India, state, central and urban co-operative banks, local area banks and regional rural banks.
  • The deposit insurance cover is capped at Rs 1 lakh, which includes principal as well as interest.
  • The revision of Rs 1 lakh was made in 1993, 26 years ago.
  • In other BRIC countries like Brazil and Russia stand at Rs 42 lakh and Rs 12 lakh, respectively.

Why a revision is needed?

The SBI research report rightly said, "The current upper limit of Rs 1 lakh per depositor, we believe, has outlived its shelf life and there is a need to revisit it."

Their research found that while over 70 percent of the bank deposits in India are covered by DICGC's insurance, only 7.8 percent of these deposits are smaller than Rs 1 lakh. Customers with deposits of over Rs 15 lakh but less than Rs 1 crore, with an average of Rs 35 lakh made for 20.4 percent of the depositors.

 

It further suggested that the DICGC coverage should be revised and bifurcated into two categories: desirable coverage of at least Rs 1 lakh for savings deposits which are around 90 percent of total accounts, and a desirable coverage of at least Rs 2 lakh for term-deposits which are around 70 percent of total accounts.

It also said that there should be separate provision for senior citizens. As India does not have a social security scheme for the retired, most of them keep their savings in fixed deposits, making the need for a higher deposit insurance bracket more desirable.

Read more about: dicgc insurance deposits banking
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