Why Rs 5 Lakh Deposit Insurance May No Longer Be Enough for Savers

Think of deposit insurance as a safety net for your savings. In India, if your bank shuts down for some reason, you’re guaranteed to get back up to Rs 5 lakh from your deposits in that bank. It applies per person, per bank—so if you have accounts in two different banks, each one is insured up to Rs 5 lakh. It’s a basic layer of protection that gives people some peace of mind. It covers savings, fixed, current, and recurring deposits. It is important to remember that both the principal amount and the accrued interest are covered under insurance. 

A while ago, the Finance Minister had hinted that an increase in deposit insurance was under consideration. With the prior approval of the government, the Deposit Insurance and Credit Guarantee Corporation (DIGC) raised the deposit insurance coverage limit from Rs 1 lakh to Rs 5 lakh with effect from February 4, 2020.

“Rs 5 lakh isn’t what it used to be. These days, a lot of people keep more than that in their savings or fixed deposit accounts—especially retirees or individuals saving for big goals. Anything above Rs 5 lakh isn’t covered if a bank fails, which can be a real worry. So there’s a growing feeling that the insurance limit should be increased to match the way people save now,” says  Amit Suri, CFP, founder, Aum Wealth. 

An increase in the limit would simply give you more protection. Let’s say you’ve got Rs 10 lakh in a bank—if the limit goes up, a bigger portion of your money is safe no matter what happens. That kind of security makes it easier to trust the banking system. Until that happens, though, it’s smart to spread your money across two or three banks instead of putting it all in one place. So, if you have Rs 12 lakh savings accounts, spread them across three banks so that your risks are covered. 

It is also important to remember that you do not need to worry about your deposits in mainstream banks like SBI, HDFC, Axis, ICICI, and so on. The risk of your money increases only when it is with a small cooperative bank. There have been instances of such banks defaulting in the past. In a recent occurrence, the RBI had sent a notice to New India Co-operative Bank, putting a halt to all financial transactions and this had spooked the customers. 

“You could also think about putting some of it in liquid mutual funds—they’re easy to access and might give you better returns with more risks than a regular savings account,” says Suri.