What will happen to your money, if bank fails? Deposit Insurance explained
Fraud in PMC Bank is the most
talked about topic now days. This incident has shown how vulnerable banks in India,
especially cooperative banks are to frauds. We all have seen footage of hapless
customers, waiting outside bank in hope of withdrawing their money. Most of the
customers belongs middle class who have their life earning savings deposited on
bank.
With this in context, it is
important that, we all know about safety of our hard earned money in bank. Here
comes the concept of “deposit insurance”. Let’s now first learn about history of Deposit
Insurance.
History
The issue of safety of depositor’s
money first came into limelight in 1948 after the banking crisis in Bengal. However,
nothing happened in next 12 months and only after failure of 2 more banks in
1960, government swung into action and on 1st Jan 1962, The Deposit Insurance Act, 1961 came
into force. The level of deposit insurance was fixed at ₹ 30,000. In 1980, it
was increased to ₹ 1 Lakh. This means, the depositors will get money up to ₹ 1
Lakh in case of liquidation of bank.
The bank deposits are insured by
Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the
Reserve Bank of India. The agency does not directly charge any premium from
bank depositors but banks pay a nominal premium for the cover. Banks pay 10
paisa per ₹ 100 on an annual basis
However, expert committees formed
later called for an increase in the level of deposit insurance. For instance,
the Committee on Customer Services in Banks, M Damodaran-led had recommended a
5 fold increase in deposit insurance (means ₹ 5 lakhs) in 2011.
Highlights of Deposit Insurance
This deposit guarantee can be
released only if the bank gets closed. It cannot be released if the bank is a
going concern.
The ₹1 lakh limit covers both
principal and interest amount.
All deposits maintained across
all branches of the failed bank are clubbed. Or in other words, if a person
keeps deposits in different branches of a bank, they are paid a maximum of up
to ₹ 1 lakh only on the aggregate amount.
However, deposits maintained with
different banks are not clubbed.
The deposit insurance scheme
covers all banks operating in India including private sector, co-operative and
even branches of foreign banks in India. There are some exemptions like
deposits of foreign governments, deposits of central/state governments and
inter-bank deposits.
Current Status
This issue has again emerged
after PMC bank fraud. We must note that customers profile have changed
drastically in last few years and hence there is need to increase the cover as
well.
Finance Ministry is with
discussion with all stakeholder including banks, the DICGC and the Reserve Bank
of India (RBI). These talks are in preliminary stage but we could see increase
in deposit limit to ₹ 3 lakhs from ₹ 1 Lakhs. Parliament nod may be taken
during winter session for this.
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