The recent incident of restriction by the Reserve Bank of India (RBI) on the withdrawal of money kept with a failing bank has raised several questions for the common man. "Is my money safe with banks?, "Why is my money blocked?, "Is keeping money in bank in savings / deposit account akin to lending to a bank? "Why is my deposit amount not fully covered by insurance?", are some of the queries that keep rising.
Banks, including regional rural banks, local area banks, foreign banks with branches in India, and cooperative banks, are mandated to take deposit insurance cover with the Deposit Insurance and Credit Guarantee Corporation (DICGC) constituted by a Central Act and governed by the RBI. The DICGC has been in existence since 1978 to serve as deposit insurance and credit guarantee for banks in India.
How is the premium paid by banks calculated?
All registered insured banks are liable to pay to the DICGC deposit insurance premium at the rate of 10 paise per annum for every deposit of Rs 100 (i.e 0.10 percent p.a) for the half year ending March and September on the total deposits of the bank as on the preceding half year. The premium paid by the insured banks are computed on the basis of their assessable deposits.
How much of the deposit amount is insured?
Initially, under the provisions of Section 16(1) of the DICGC Act, the insurance cover was limited to Rs 1,500 only per depositor(s) for deposits held by him (them) in the "same right and in the same capacity" in all the branches of the bank taken together. However, the Act also empowers the Corporation to raise this limit with the prior approval of the Central Government. Accordingly, the insurance limit was enhanced from time to time and the current limit of Rs 1 lakh was fixed with effect from 1 May 1993 onwards.
Each depositor in a particular bank is insured up to a maximum of Rs 1 lakh for both principal and interest amount held by him in the same right and capacity as on the date of liquidation or cancellation of the bank’s licence or the date on which the scheme of amalgamation or merger or reconstruction comes into force.
So, if a person in his individual capacity owns various accounts such as a savings account, current account, fixed deposit or a recurring deposit in his sole name, the insurance cover will be limited to Rs 1 lakh for all accounts. Having deposits in different branches of the same bank under same ownership capacity will restrict the total cover to Rs 1 lakh.
If individuals jointly hold more than one deposit account in one or more branches of a bank and if their names are registered in the same order everywhere, then all these accounts are considered as one. However, depositors get separate insurance cover of up to Rs 1 lakh for joint accounts where the names appear in different order or the set of names are different in each account.
Should there be a restriction of Rs 1 lakh for the deposit insurance cover?
Banks pay insurance premium on the total value of the deposits held by the bank. However, the insurance cover is restricted to Rs 1 lakh value of the deposit only. Why should there be a restriction on the deposit insurance claims as it appears that the full amount of deposits are insured? Further, for illustrative purposes only, when compared with life insurance cover, it appears that the premium paid for a term life policy of insurance cover of Rs 1 crore is approximately Rs 5,880 while the deposit insurance premium paid by the bank to the DICGC for a deposit of Rs 1 crore is Rs 10,000.
Should this insurance cover of Rs 1 lakh be increased?
The insurance limit of Rs 1 lakh is effective from 1 May 1993 onwards. However, as indicated by the following table, there is a need to increase this cover.
* As at end March from 1992-93 onwards
** The number of registered insured banks as on March 31, 2019 stood at 2,098, comprising 157 commercial banks [including seven Payment Banks (PBs), 10 Small Finance Banks (SFBs), 51 Regional Rural banks (RRBs) and three Local Area Banks (LABs)] and 1,941 co-operative banks.
*** Deposits eligible for deposit insurance up to Rs. 1 lakh each
It can be observed from the table above that all 350 accounts were fully protected in 1993-94 as compared to 92 percent of the accounts that are now protected in 2018-19. Further in 1993-94, 67.67 percent of the Assessable Deposits were Insured Deposits, while in 2018-19, only 28.07 percent of the Assessable Deposit are Insured Deposits.
A common man typically places his money in a savings bank account and deposit account with banks. He is not in the business of lending the money to banks. So the entire amount of money placed with banks should be safe and guaranteed to be returned to depositor holders.
(By Bahroze Kamdin, Partner, and Jhankhana Thakkar, Manager, with Deloitte Haskins and Sells LLP)