Bank deposit insurance cover: Under the existing system, when a bank collapses, the account holders get insurance of up to Rs 5 lakh under the Deposit Insurance and Credit Guarantee Corporation Act (DICGC).
Deposit Insurance Limit: Recently, when the scam of New India Co-operative Bank came to light, news came that the government may soon take a decision on increasing the insurance cover on the amount deposited in the bank. Under the current system, bank deposits get a cover of up to Rs 5 lakh. If the government does this, crores of bank customers will get relief, but this relief can also increase the problems of banks. Now a report has come out regarding this, which has raised the question whether the government can change its mind?
How much will be the impact?
Rating agency ICRA says that increasing the insurance cover limit on bank deposits is likely to affect the profits of banks. According to the agency, if the insurance cover is increased, it can reduce the profits of banks by up to Rs 12 thousand crore. ICRA says that by March 2024, 97.8 percent of bank accounts were fully covered, as the amount deposited in them was within the limit of Rs 5 lakh. The insured deposit ratio (IDR) stood at 43.1 per cent by value of deposits as on March 31, 2024. A change in this IDR adversely affects the profitability of banks as they have to pay more money as premium.
What is the system now?
Under the current system, when a bank collapses, the account holders get insurance up to Rs 5 lakh under the Deposit Insurance and Credit Guarantee Corporation Act (DICGC). For this, the account holder has to submit a claim, the insurance amount is given to the eligible customers. In this situation, those people suffer a big loss who have more than Rs 5 lakh in their account. DICGC collects premium from banks to provide insurance cover to the customers in case of a bank collapse.
Will it get approval this time?
After the New India Co-operative Bank scam came to light, Department of Financial Services Secretary M Nagaraju had said that the proposal to increase the insurance cover is under consideration. Its notification will be issued as soon as the government approves it. By the way, this demand has been raised earlier as well. But no decision could be taken on this. Now after the bank scam that has come to light, this demand has gained momentum again. However, it remains to be seen whether the government approves it keeping in mind the losses to the banks.
When was the increase done earlier?
The last time the insurance limit of DICGC was increased was in the year 2020. This happened after the PMC Bank scam came to light. Then this limit was increased from Rs 1 lakh to Rs 5 lakh. The Punjab and Maharashtra Co-operative Bank (PMC) scam came to light in September 2019. RBI had come to know that PMC Bank was using fake bank accounts to give a loan of about Rs 6500 crore to a Mumbai-based real estate developer. After this, RBI had fixed a limit for withdrawing money from the bank.
