Deposit insurance protects bank customers if a deposit-insured depository institution fails. Bank customers don’t need to purchase deposit insurance; it is automatic for any deposit account opened at a deposit-insured bank. Deposits are insured up to a stated amount per depositor, per deposit insured bank.
The depository Insurance agency acts as the “Insurer” of the bank’s deposits, paying deposit insurance to the depositors up to the insurance limit.
Scenario When a Bank Fails
A bank failure is closing a bank by a banking regulatory agency like RBI in India. It generally results from a bank’s inability to meet its obligations to depositors and others. In the unlikely event of a bank failure, the banking regulations act quickly to ensure depositors get prompt access to their insured deposits.
The deposit insurance covers the balance of each depositor’s account, up to the insurance limit, including principal and any accrued interest through the insured bank’s closing date.
Deposit Insurance and Credit Guarantee Corporation of India (DICGC)
Deposit Insurance and Credit Guarantee Corporation (DICGC) is a wholly-owned subsidiary of the Reserve Bank of India (RBI). It provides deposit insurance as a protection cover for bank deposit holders when the bank fails to pay its depositors.
Each depositor in a bank is insured up to a maximum of ₹ 5,00,000 (Rupees Five Lakhs) for both principal and interest amount held by him in the exact right and same capacity as on the date of liquidation or cancellation of the bank’s license or the date on which the scheme of amalgamation or merger or reconstruction comes into force.
The deposits kept in different bank branches are aggregated for insurance cover, and a maximum amount of up to Rupees five lakhs is paid.
The DICGC insures principal and interest up to a maximum amount of Rs 5 lakhs. So, for example, if an individual had an account with a principal amount of 4,90,000 plus accrued interest of 5,000, the total amount insured by the DICGC would be 4,95,000. If, however, the principal amount in that account was five lakhs, the accrued interest would not be guaranteed, not because it was an interest amount but because that was the amount over the insurance limit.
If you have deposits with more than one bank, the deposit insurance coverage limit is applied separately to the deposits in each bank.
The deposit insurance premium is borne entirely by the insured bank.
What does the DICGC insure?
The DICGC insures all deposits, such as savings, fixed, current, recurring, etc., except the following types of deposits.:-
- Deposits of foreign Governments;
- Deposits of Central/State Governments;
- Inter-bank deposits;
- Deposits of the State Land Development Banks with the State cooperative bank;
- Any amount due on account of any deposit received outside India.
- Any amount the corporation has specifically exempted with the previous approval of the Reserve Bank of India.
Which banks are insured by the DICGC?
All commercial banks, including branches of foreign banks functioning in India, local area banks, and regional rural banks, are insured by the DICGC.
All State, Central, and Primary cooperative banks, also called urban cooperative banks, functioning in States / Union Territories, have amended the local Cooperative Societies Act per required guidelines covered under the Deposit Insurance Scheme. At present, all cooperative banks are covered by the DICGC. However, the DICGC does not insure primary cooperative societies.
Conclusion: Need for Deposit Insurance for Individuals and the Economy
Deposit insurance is one of the essential financial services. It prevents people from losing all their money when banks fail. The main benefits of deposit insurance are: Deposit insurance is provided by the national deposit insurance agency, which supervises the country’s central bank.
Deposit insurance aims to provide depositors with comprehensive protection against loss and the smooth functioning of the country’s financial system. The deposit insurance agencies guarantee the safe and reasonable return of deposits up to the insured amount and couldn’t be higher than the amount deposited.