Deposit insurance of Rs 5 lakh may not be enough for your FDs

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When a bank goes in for liquidation, your fixed deposits remain safe as each depositor in a bank is insured up to a maximum of Rs 5,00,000 for both principal and interest. The latest data put out by the Reserve Bank of India (RBI) in its annual report reveals the penetration of this deposit insurance in the country. Statistics reveal that 98.1% of the total number of 252.6 crore accounts remain covered against the international benchmark of 80%.

The number, however, doesn’t look so attractive when compared in terms of amount. The total insured deposits of Rs 76,21,258 crore constitute just 50.9 % of assessable deposits of Rs 1,49,67,776 crore. The number indicates that a cap of Rs 5 lakh is not enough as the size of fixed deposit for most of the depositors might be much more than Rs 5 lakh.

The insurance limit gets revised periodically. It has recently been increased in 2020 to Rs 5 lakh from 1 lakh. Earlier, it was revised to Rs 1 lakh in 1993 from the limit of Rs 5,000 in 1968.

The Deposit Insurance and Credit Guarantee Corporation (DICGC) insures each depositor in a bank up to a maximum of Rs 5,00,000 as on the date of liquidation, cancellation of the bank’s license or the date on which the scheme of amalgamation, merger, reconstruction comes into force.

DICGC is a wholly-owned subsidiary of the RBI constituted under the DICGC Act, 1961. Deposit insurance provided by the DICGC covers all insured commercial banks, including LABs, PBs, SFBs, RRBs and co-operative banks.

The DICGC builds up its Deposit Insurance Fund (DIF) from the premium received from insured banks, interest income from investments, and cash recovery from failed banks’ assets. This fund is available for the settlement of claims of depositors of banks taken into liquidation, amalgamation. As per the un-audited data, the size of the DIF stood at Rs1,29,936 crore as of March 31, 2021, yielding a reserve ratio of 1.70 per cent.

Banks liquidated in 2020-21

Five cooperative banks and one LAB were liquidated during the year 2020-21. According to the RBI report “As per the un-audited data, the Corporation has processed claims amounting to Rs993 crore during 2020-21 to ensure payment to insured depositors of liquidated banks under the prevailing pandemic situation. Of Rs993 crore, the Corporation has settled claims amounting to Rs564 crore in respect of nine co-operative banks during 2020-21. An amount of Rs 330 crore has been settled in the case of one cooperative bank in April 2021. However, the net outgo of funds towards the settlement of claims.”