Deposit Insurance Cover May Increase from Rs 5 Lakh: DFS Secretary Nagaraju February 18, 2025 by
Deposit Insurance Cover May Increase from Rs 5 Lakh: DFS Secretary Nagaraju
Introduction In a move that could significantly enhance financial security for depositors, the Indian government is reportedly considering increasing the deposit insurance cover beyond the current limit of Rs 5 lakh. This announcement, made by Department of Financial Services (DFS) Secretary Vivek Joshi Nagaraju, comes amid growing concerns over the safety of deposits in financial institutions, particularly in light of recent banking crises worldwide.
Background of Deposit Insurance in India Deposit insurance in India is currently managed by the Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the Reserve Bank of India (RBI). The coverage was last increased in February 2020, when it was raised from Rs 1 lakh to Rs 5 lakh in response to concerns following the collapse of Yes Bank and the crisis at Punjab and Maharashtra Cooperative (PMC) Bank. The move aimed to instill confidence in depositors and prevent panic withdrawals during financial distress.
Why an Increase is Being Considered? The proposal to enhance deposit insurance cover stems from multiple factors:
- Growing Banking Sector Risks: As India’s banking system expands, there is a need to ensure a robust safety net for depositors, especially in cooperative banks and smaller financial institutions.
- Rising Inflation and Savings Growth: With inflation impacting the value of money, an increased insurance cover would help safeguard a larger portion of depositors’ savings.
- Global Banking Trends: Countries like the United States and Canada offer higher deposit insurance limits, and India may follow suit to align with international standards.
- Recent Banking Failures: While India’s banking sector remains relatively stable, isolated cases of financial mismanagement and fraud necessitate stronger protection for depositors.
Potential Benefits of Enhanced Deposit Insurance
- Increased Depositor Confidence: A higher insurance limit would reassure customers that their money is safe even if a bank fails.
- Stronger Banking System: With greater trust in the banking system, depositors are more likely to keep their savings in banks rather than seeking alternative investment avenues.
- Better Financial Inclusion: Rural and small-scale depositors, who often rely on cooperative banks, would benefit from greater protection.
- Economic Stability: Preventing bank runs and ensuring the stability of financial institutions could contribute to overall economic resilience.
Challenges and Concerns While an increase in deposit insurance cover presents numerous advantages, certain challenges must be addressed:
- Higher Premiums for Banks: A rise in coverage may lead to increased premium costs for banks, which could be passed on to customers.
- Moral Hazard: Excessive reliance on deposit insurance might encourage some banks to take undue risks, assuming depositors are fully protected.
- Implementation Logistics: Revising and enforcing new insurance limits would require extensive coordination between regulatory bodies and financial institutions.
Government’s Perspective and Roadmap DFS Secretary Nagaraju emphasized that the government is currently assessing the feasibility of the proposal in consultation with RBI and DICGC. The new limit, if approved, will likely be introduced in a phased manner to ensure a smooth transition without disrupting the banking ecosystem. The government may also explore differentiated insurance limits based on the type and size of financial institutions.
