Impact of hike in deposit insurance to Rs 5 lakh for bank deposits

The Budget 2020 proposes to hike the insurance limit for bank deposits to Rs 5 lakh per depositor from the existing limit of Rs 1 lakh. The Finance Minister has announced the proposal in the budget speech as part of banking reforms.

The Deposit Insurance and Credit Guarantee Corporation (DICGC) provides insurance for bank deposits. Presently, under the DICGC cover, the deposits and interest thereon held in a bank are covered up to Rs 1 lakh. The insurance cover is for deposits held in fixed deposits, savings account, current account and other deposits. Further, the insurance covers all deposits with commercial banks and co-operative banks, except Primary Cooperative Societies. 

The insurance cover by DICGC ensures that in the event of bankruptcy, the depositor will be able to recover up to the amount insured. Under the existing DICGC cover, a depositor would not be able to recover their money above Rs 1 lakh. 

The insurance cover of Rs 1 lakh is in place since 1993. The recent losses in the financial sector necessitated steps for boosting the confidence of retail depositors. Also, though the base of deposits increased since 1993, there was no corresponding increase in the insurance coverage.

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The announcement of an increase in deposit insurance will ease depositors concerns, including senior citizens who heavily rely on bank deposits. The increase in the insurance cover will increase the expenditure of banks towards premium payments. 

An account holder holding accounts with two or more branches of the same bank will be entitled to an overall insurance cover of Rs 5 lakh. However, if an account holder holds one account singly and another jointly, then both the accounts will have individual insurance coverage of Rs 5 lakh each.

The below deposits do not have DICGC insurance coverage:

  1. Deposits of foreign governments;
  2. Deposits of central/state governments;
  3. Inter-bank deposits;
  4. Deposits of the State Land Development Banks with the State Co-Operative Bank;
  5. Any amount due on account of any deposit received outside India
  6. Any amount, which has been specifically exempted by the corporation with the previous approval of the Reserve Bank of India.

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