How safe are your bank deposits?

Following the 2008 Global Financial Crisis, particularly the US government’s heavy spending to bailout some troubled TBTF (Too-Big-To-Fail) Banks, the idea of a bail-in, in place of the bailout is gaining ground widely in the financial world. Simply put, a bailout involves propping up the failing banks with money from outside (say the exchequer) to safeguard the banks’ (in other words, depositors’) interest, while a bail-in implies protecting the banks with the support of the stakeholders’ (that includes depositors) money. What a paradox! A shift from using public money to protect public deposits to using the very same deposits to protect failing banks.

Not only do these kinds of thoughts frighten bank depositors, but the occasional bank failure news also frightens them. To alleviate their fears, the Indian government, inter alia, has enhanced the DICGC (Deposit Insurance and Credit Guarantee Corporation) coverage limit of bank deposits from Rs 1 lakh (in force since May 1, 1993) to Rs 5 lakh, effective February 4, 2020. That prima facie means the depositor’s money up to Rs 5 lakh is safe, come what may. But there is more to it than meets the eye.

It would be good if the depositors knew how safe their money was to that extent and how they could secure it even more. They need to know which among the innumerable banks and branches around them is safe. For this understanding, an understanding of the genesis, evolution, and functioning of the DICGC, though briefly, would be of great help to the bank depositors.

The banking crisis that erupted in Bengal in 1948 made the government think about some protection for the depositors to guard against the recurrence of similar failures in the country, although no immediate action was taken, not even after the Rural Banking Enquiry Committee’s reassertion in 1950.

It was only in 1960, after the failure of two more banks in the country, Laxmi Bank and Palai Central Bank Ltd., that the government introduced the Depositors’ Insurance Corporation (DIC) Bill 1961, which came into force in January 1962 after its passage in Parliament and the President’s assent. This first enactment to provide insurance coverage for bank deposits is known as the Deposit Insurance Act, 1961. As its name suggests, it covered only deposits, not credit. The DIC, which covered only commercial bank deposits in the beginning, started including cooperative bank deposits as well after the 1968 amendment.

The deposit amount covered in the beginning was Rs 1,500, which was gradually increased to Rs 1 lakh in about 60 years before the quantum jump of Rs 5 lakh
in 2020. The insurance premium is 0.12%. The burden of paying the premium is exclusively on the banks; the depositors need not pay it.

The RBI promoted a Credit Guarantee Corporation of India Ltd, a public limited company, in 1971 to support bank credit to the poor and priority sectors. Then, in 1971, the Deposit Insurance Corporation and Credit Guarantee Corporation of India were merged to form the Deposit Insurance and Credit Guarantee Corporation (DICGC), and the Deposit Insurance Corporation Act, 1961, was renamed the Deposit Insurance and Credit Guarantee Act, 1961. But by April 2003, all the participating banks had gradually withdrawn their participation with regards to credit. So, the DICGC’s main function thereafter remains deposit insurance alone. This does not mean the banks have the freedom to withdraw from the deposits’ coverage function, either. If they do that, they will forego the RBI’s licence to function as a bank.

Therefore, the deposits are safe to the extent guaranteed by all the banks covered by the DICGC. It is clear from the DICGC’s website that all the 2025 banks are spread across 10 categories: public sector banks (12); private banks (21); foreign banks (44); small finance banks (12); payment banks (6); regional rural banks (43); local area banks (2); state cooperative banks (33); district central cooperative banks (352) and urban cooperative banks (1,500).

The government claims that the depositors and their deposits are largely protected with the hike in insurance coverage to Rs 5 lakh when a bank fails and also when the RBI issues the All-Inclusive Direction (AID) to the banks when it senses something wrong. Finance Minister Nirmala Sitharaman stated that 98.3% of the deposit accounts and 50.3% of the deposit value are covered. This can be understood as assessable deposits excluding those ineligible for coverage sums like those of governments (state, central, and foreign).

Banks in India have a huge amount of deposits, signifying the people’s confidence in banks. As of March 2023, the scheduled commercial banks had Rs 190.35 lakh crore in deposits, which account for 70.80% of the estimated nominal GDP.

Let us now turn to the nitty-gritty of protecting Rs 5 lakh (both principal and interest together) and more in any bank covered under the DICGC (the name of each bank is available for public verification on the DICG’s site). The rule is “Same Right, Same Capacity.” If a person, for example, has several accounts in one bank or several branches of the same bank, protection is given for Rs 5 lakh even if the balance is higher. Instead, if the same person in the same bank holds interest differently, the accounts are treated as different accounts and will accordingly get protection. If a person holds accounts in several banks, he gets protection separately for each bank.

Undoubtedly, the DICGC protection is beneficial to the extent it provides it, but not fully. The government must fully regulate and protect all deposits in all banks.

(The writer is a development economist and writes on economic and social affairs)