Deposit Insurance Reforms

Deposit insurance is a crucial element of a stable financial system. It protects depositors, especially small savers, by assuring that a portion of their deposits is safe even if a bank fails. In India, the Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the Reserve Bank of India (RBI), manages this function. With rising concerns over banking failures and financial security, several reforms have been introduced in the deposit insurance system to enhance depositor confidence, expedite payouts, and align with global best practices.

Historical Background of Deposit Insurance in India:

India introduced deposit insurance in 1962, becoming the second country in the world to offer it, after the USA. The Deposit Insurance Corporation (DIC) was established under the Deposit Insurance Act, 1961, to protect small depositors. In 1978, it was merged with the Credit Guarantee Corporation to form the DICGC. Over time, the insurance coverage increased gradually—from ₹1,500 in 1962 to ₹1 lakh in 1993, and most recently, ₹5 lakh in 2020. However, real-time responsiveness and speedy compensation remained issues until recent reforms addressed them.

Reform: Increase in Insurance Coverage (2020):

One of the most significant reforms was the increase in deposit insurance coverage from ₹1 lakh to ₹5 lakh in the Union Budget 2020. This reform came in the wake of major banking crises such as the Punjab and Maharashtra Co-operative Bank (PMC) collapse, where depositors were locked out of their funds. The increase enhanced depositor confidence and aligned the coverage better with the average deposit size in Indian banks. It now covers 98% of all deposit accounts, though only around 50% of the value of total deposits.

Introduction of Time-Bound Payouts (2021 Amendment):

Earlier, depositors faced long waits—sometimes years—before receiving insured amounts after a bank’s failure. To address this, the Deposit Insurance and Credit Guarantee Corporation (Amendment) Act, 2021 was passed.
Key features include:

• Mandating payout within 90 days of imposition of moratorium on a bank.

• Ensuring interim payments if final data is unavailable.

• Applicable to commercial banks, small finance banks, payment banks, and regional rural banks.

This reform made the deposit insurance framework more agile and depositor-friendly, especially during emergencies.

Coverage Scope and Conditions:

The insurance cover applies to:

• Savings, fixed, current, and recurring deposit accounts.

• Across all types of banks: public sector, private sector, foreign, cooperative, and regional rural banks.
  However, coverage is capped at ₹5 lakh per depositor per bank, including principal and interest. Deposits held in different capacities (e.g., individual vs. joint) are treated separately. This structure encourages deposit diversification while providing safety to small and medium depositors.

Risk-Based Premium Mechanism:

Traditionally, all banks paid a flat premium to DICGC. A major reform under consideration is to move toward a risk-based premium model, where banks with higher risk profiles (e.g., poor asset quality or low capital adequacy) would pay more. This approach:

• Encourages better risk management in banks.

• Helps in better allocation of DICGC’s funds.

• Aligns with global norms followed by countries like the USA and UK.

Though not fully implemented, it remains a key recommendation for the future of deposit insurance in India.

Pre-Funding the Insurance Pool:

The DICGC operates a pre-funded insurance pool by collecting annual premiums from insured banks. With reforms, the fund has become more robust and well-capitalized. Banks now pay a higher premium—12 paise per ₹100 of deposits, raised from earlier 10 paise—ensuring that DICGC is better prepared to respond to contingencies. As of 2023, DICGC’s fund corpus has grown significantly, reflecting the resilience of the system.

Inclusion of Cooperative Banks and Financially Weak Institutions:

The PMC crisis highlighted the need to include urban cooperative banks and other financially stressed institutions more actively under the deposit insurance umbrella. Reforms have enhanced surveillance and reporting requirements from such banks, enabling DICGC and RBI to act early in crisis situations. Monitoring mechanisms have been improved to detect signs of bank stress in advance and prepare the insurance payout process proactively.

Communication and Transparency Improvements:

Recent reforms emphasize better public communication regarding deposit insurance:

• Banks must display DICGC coverage details prominently at branches and websites.

• Awareness campaigns have been launched to inform depositors of their rights and the coverage mechanism.
  This builds trust and ensures that depositors make informed decisions while choosing banking institutions.