Deposit Insurance: Are Your Bank Deposits Safe?

Following the recent bank failures, including the New India Co-operative Bank incident, there has been heightened public anxiety regarding the safety of deposits in banks. It is crucial to understand the protection mechanisms in existence for depositors. Let us take a look at how the deposit insurance mechanism functions in India, its coverage, and how it functioned during the New India Co-operative Bank fiasco.

What is the Deposit Insurance Scheme?

The Deposit Insurance and Credit Guarantee Corporation (DICGC), which is a wholly-owned subsidiary of the Reserve Bank of India (RBI), was established in 1978 to provide insurance cover to depositors of banks. The DICGC primarily insures deposits and provides credit guarantees so that public faith in the banking system can be guaranteed. 

The DICGC covers all forms of bank deposits, such as savings, fixed, current, and recurring deposits, to a maximum of Rs 5,00,000 per depositor in each bank. The limit was raised from Rs 1,00,000 to Rs 5,00,000 on 4th February 2020, to increase the protection for the depositors. 

How Does Deposit Insurance Work?

In case of bank failure, the DICGC pays each depositor up to Rs 5,00,000 of both the principal and interest amount lying in the same capacity and right. When the depositor maintains more than one account in a bank, the amounts are clubbed and the insurance cover is extended to the limit of Rs 5,00,000. Deposits in various banks are insured separately.

RBI proceeded against New India Co-operative Bank's operations in February 2025 in the wake of mass-scale financial malpractice and regulator failures. It replaced the bank board for a duration of 12 months, stripping it of powers, installing an administrator in charge. Accordingly, its depositors lost the withdrawal of their deposits, generating mass-scale distress and uproar among holders of deposits.

Impact on Depositors

The New India Co-operative Bank crisis put the deposit insurance scheme under close scrutiny as to whether it was functioning or not:

• Adequacy of Cover: While the DICGC insures deposits of Rs 5,00,000 and above, several depositors had amounts higher than this in their accounts, meaning a part of their funds was not insured. This has rekindled the question of whether the current cover limit is adequate, particularly for those with substantial amounts of savings.

• Withdrawal Restrictions: The depositors were immediately prevented from withdrawing funds once the RBI intervened. Even though the DICGC insures, it is not instantaneous to make a claim for these insured sums. This takes the form of liquidation or reorganisation of the bank, and depositors may be prevented from making claims for their insured sums.

• Emergency Provisions: Realising the predicament of the depositors, particularly the ones with pressing personal or medical needs, the RBI thought about granting special emergency withdrawals. This step was to give temporary relief while more permanent arrangements were being constructed.

Requests for Reform

The New India Co-operative Bank mishap has mounted requests for reforms in the deposit insurance system:

• Raising Threshold of Coverage: Given that the insurance limit last was updated in 2020, there has been growing pressure to reconsider as well as upgrade the coverage figure to provide additional protection for larger-balance depositors.

• Coverage under Full Insurance: Consumer associations like the Mumbai Grahak Panchayat (MGP) have demanded that the government modify the DICGC Act so that full insurance coverage is ensured for all deposits in banks without any cap on the amount. According to them, depositors should not lose their hard-earned money even if a bank fails.

Deposit Insurance and Credit Guarantee Corporation is the centre point for protecting the interests of depositors in India. Although the current coverage of Rs 5,00,000 acts as a buffer to the majority, incidents like the New India Co-operative Bank crisis identify potential gaps in cover, especially for customers who have higher deposits. Along with the growth in the financial system, the regulatory authorities should continuously review and improve the regime of deposit insurance so that the depositor interests are served in consonance and the confidence reposes in the banking system of the country.

To mitigate risks, diversification of funds in several banks and close watch on the financial health of their respective banks by depositors are sound actions.