How deposit insurance agency safeguards bank deposits

Adhil ShettyBankBazaar.comIt is always considered to be a safe bet to park your hard earned money in banks. However, in the unlikeliest of circumstances, what if your bank is facing bankruptcy? In such situations, the Deposit Insurance and Credit Guarantee Corporation (DICGC) will bail you out to a certain degree. Let us look at the role of the DICGC and how it can help. The role of the DICGCThe DICGC was formed for providing insurance to bank deposits and guaranteeing credit facilities. It is an arm of the Reserve Bank of India (RBI) governed by The Deposit Insurance and Credit Guarantee Corporation Act, 1961, and The Deposit Insurance and Credit Insurance Corporation General Regulations, 1961. The DICGC has an authorised capital of Rs 50 crore, which is fully issued and subscribed by the RBI. Extent of DICGC coverage The DICGC covers all commercial banks in private and public sectors. These include foreign banks operating in India, local area banks and regional rural banks. However, primary cooperative societies are not covered by the DICGC. As of now, 2,128 banks are insured under the DICGC. All new commercial banks are required to register with the corporation as soon as they get banking licenses. It insures all kinds of deposits, including savings, fixed, current and recurring deposits.This insurance does not cover inter-bank deposits, deposits of central and state governments and foreign governments. The deposits of the State Land Development Banks with state co-operative banks also do not come under the ambit of the DICGC.The corporation collects premium for the insurance from banks, which are required to pay the premium before the last day of May and November each year. Quantum of coverageThe insurance limit is Rs 1 lakh. If your deposit holdings exceed this limit, your entire deposit will not be protected by the DICGC in case of bank liquidation.The limit includes the principle amount and accrued interest. If a customer or joint account holder is holding multiple accounts in many branches of a bank, the aggregate of all deposits is taken into consideration for computation. If you have deposits at two different banks and both are liquidated on the same day, then the funds from each bank are insured separately.How it worksThe DICGC is liable to pay each depositor through the liquidator the amount of the deposit up to a maximum of Rs 1 lakh. This payment is to be done within two months of the date of receipt of the claim list from the liquidator. If a bank is reconstructed, amalgamated or merged with another bank, the corporation pays the bank concerned the difference between:• the full amount of deposit or the limit of insurance cover in force at the time, whichever is lesser; and• the amount received by the depositor under the reconstruction or amalgamation schemeCogwheels of a well-oiled banking system Even though the risk associated with certain banks may be high and that of others may be low, but the insurance limit for bank deposits remains Rs 1 lakh. This may work against the interest of bank customers; however, in certain cases, the perceived higher risk is offset partially by the higher deposit interest rates offered by the bank in question.With the last insurance limit revision dating back to 1993, there have been calls to revise the current limit while also taking the risk differential into consideration.