Government Set to Hike Deposit Insurance to ₹8-12 Lakh by End of February
Insurance : The Indian government is preparing to raise the deposit ins cover for bank deposits to a range of ₹8-12 lakh, a significant increase from the current ₹5 lakh. This move, expected by the end of February, aims to enhance financial security for depositors and restore confidence in the banking system, especially in the wake of recent banking crises.
Why Is the Government Increasing Deposit Insurance?
During a post-budget interaction, Financial Services Secretary M Nagaraju confirmed that the government was actively considering raising the deposit ins limit. This decision gains importance amid the recent crisis at New India Co-operative Bank, where a ₹122 crore scam led to police action against the bank’s General Manager and an accomplice. The Reserve Bank of India (RBI) responded by superseding the bank’s board, appointing an administrator, and restricting deposit withdrawals.
Given the concerns over financial stability, the proposed hike in deposit insurance is a critical step to reassure bank customers and prevent panic in case of future banking failures.
What Is Deposit Insurance and How Does It Work?
Deposit insurance is a protective measure that ensures depositors get back their money even if a bank collapses. In India, this insurance is managed by the Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly-owned subsidiary of the RBI.
Under this scheme, deposits in commercial banks, regional rural banks, local area banks, and cooperative banks are insured. However, deposits belonging to foreign governments, the central or state governments, and inter-bank deposits are not covered.
Currently, each depositor in a bank is insured for up to ₹5 lakh. If a person holds deposits in multiple banks, the insurance coverage applies separately to each bank. The planned increase to ₹8-12 lakh will offer more protection to depositors, ensuring greater financial security.
Global Deposit Insurance Standards
India’s deposit insurance limit is relatively low compared to some other countries. For instance:
- United States: The Federal Deposit Insurance Corporation (FDIC) covers deposits up to $250,000 (₹20.7 lakh) per account.
- Mexico, Turkey, and Japan: Offer 100% deposit protection, covering all deposits in case of bank failure.
- United Kingdom: Covers deposits up to £85,000 (₹89 lakh) per depositor per bank.
With the proposed increase, India will move closer to global standards, offering better protection to its citizens.
Implications for Banks and Depositors
- Stronger Public Confidence – A higher insurance limit will reassure depositors that their savings are safe, even if their bank faces financial trouble.
- Reduced Panic Withdrawals – In times of banking stress, people often rush to withdraw their money, worsening the situation. A higher insurance cover can prevent such mass withdrawals.
- Higher Costs for Banks – Banks contribute to the deposit insurance fund. Increasing the coverage may lead to higher premium payments for banks, impacting their operational costs.
Recent Banking Failures and Need for Reform
The New India Co-operative Bank crisis is not the first instance of a troubled lender facing action. In recent years, several cooperative banks have faced liquidity issues and governance failures. The collapse of Punjab and Maharashtra Cooperative (PMC) Bank in 2019, for example, left thousands of depositors struggling to access their savings.
By increasing deposit insurance, the government aims to restore trust in cooperative and commercial banks, ensuring such crises do not lead to financial instability.
Financial Ratios of New India Co-operative Bank (Before Crisis)
| Financial Metric | Value |
|---|---|
| Net NPA (Non-Performing Assets) | 12.4% |
| Gross NPA | 18.9% |
| Capital Adequacy Ratio | 6.2% |
| Return on Assets (RoA) | -2.5% |
| Credit-Deposit Ratio | 68.3% |
These figures indicate that the bank was struggling with high NPAs and poor capital adequacy, making it vulnerable to failure.
Final Thoughts
The government’s decision to increase deposit insurance to ₹8-12 lakh is a major step towards safeguarding depositors’ money and ensuring stability in the banking system. With cooperative banks frequently facing financial distress, this move will provide much-needed security to millions of account holders.
As the new deposit insurance limit is expected to be implemented by the end of February, depositors can look forward to enhanced protection for their hard-earned savings.
For more market insights, follow our news.
Stay tuned for more updates and insights on the stock market! For more insights on investing in the Indian stock market, check out resource like ET, NSE India.
Disclaimer: This blog post is for informational purposes only and should not be considered financial advice. Investors should conduct thorough research and consult with a qualified financial advisor before making any investment decisions.