Government set to hike deposit insurance to Rs 8-12 lakh by end of February

The cooperative bank has been prohibited from issuing new loans, and deposit withdrawal have been suspended.

Centre is set to significantly raise insurance cover for bank deposits to Rs 8-12 lakh from current Rs 5 lakh by the end of the month, people familiar with the development told Moneycontrol.

M Nagaraju, Financial Services Secretary had during a post-budget interaction said that the government was considering increasing the limit on deposit insurance.

The expected hike in bank deposit insurance cover comes at a time when a cooperative lender - New India Co-operative Bank - has been facing regulatory action by RBI. The Reserve Bank superseded the board of the cooperative lender and appointed an administrator, after unearthing a scam to the tune of Rs 122 crore, that eventually led to police action against the General Manager and one accomplice, both of whom now under custody till Feb 21.

The cooperative bank has been prohibited from issuing new loans, and deposit withdrawal have been suspended.

Insurance on bank deposits are offered by the Deposit Insurance and Credit Guarantee Corporation (DICGC) - a wholly-owned subsidiary of the RBI - which administers deposit insurance across commercial banks, regional rural banks, local area banks as well as cooperative banks.

What is Deposit Insurance?

A deposit insurance is a cover to protect bank depositors from a lender's inability to pay back the debt when it is due. The insurance covers all forms of deposits, including savings, fixed, current, recurring, except deposits of foreign, central or state governments, and inter-bank deposits.

Currently, the depositor is insured for a sum of up to Rs 5 lakh. In case of deposits with different banks, the deposit insurance coverage limit is applied separately to the deposits in each bank.

Countries such as Mexico, Turkey and Japan promise 100 percent coverage to depositors.

Deposit insurance is a tool being used by governments worldwide to protect bank depositors from incurring losses if the bank fails, and also to safeguard the stability of the banking system. The United States was the first country to adopt an explicit deposit insurance scheme, back in 1934.