Government may increase deposit insurance amount, says DFS Nagaraju

deposit-insurance

The government is looking at a proposal to increase the deposit insurance amount, secretary of department of financial services (DFS) M Nagaraju said on February 17. However, no timeline has been specified on when the proposal would be approved.

“On the point about increase in deposit insurance, that is under consideration of the government, as and when the government approves, we will notify,” Nagaruju said at a press conference.

The talk about the increase in deposit insurance has come as the crisis in New India Co-operative Bank unfolds.

On February 13, the Reserve Bank of India (RBI) barred the Mumbai-based lender from issuing new loans and suspended deposit withdrawals for six months and superseded the board and appointed an administrator.

All banks are required to insure deposits with Deposit Insurance and Credit Guarantee Corporation (DICGC), an RBI subsidiary. Depositors of stressed banks can claim up to Rs 5 lakh from the DICGC, based on submission of willingness by the depositors concerned and after due verification. This provides some assurance for their deposits.

Until April 2021, depositors could access this cover only if the banks went into liquidation. This meant that even if a moratorium was imposed, depositors had to wait endlessly for the RBI to decide if the bank needed to go for liquidation or not. Only after that decision was taken could the depositors get some money back.

The Budget 2021 amended the rules to pave the way for providing depositors of banks placed under moratorium immediate access to deposit insurance cover of Rs 5 lakh.

Last year, RBI deputy governor M Rajeshwar Rao said that upward revision in deposit insurance coverage is warranted from Rs 5 lakh due to multiple factors like growth in the value of bank deposits, economic growth rate, inflation, increase in income levels, etc.

According to an IADI survey3, the median deposit insurer covers around 41 percent of the value of eligible deposits. The number for India is slightly higher at 43.1per cent.

In India, the number of fully protected accounts constitute 97.8 percent as on March 31, 2024 of the total number of accounts in the banking system as against the international benchmark of 80 percent. While the scope and coverage appear satisfactory, there are likely challenges going forward, Rao said.