Understanding RBI's Deposit Insurance System in India

RBI’S deposit insurance SYSTEM IN India

Overview

Deposit insurance protects bank depositors by compensating them up to a certain limit if a bank fails. It helps maintain trust and stability in the banking system and prevents panic withdrawals. In India, this crucial function is managed by the Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly owned subsidiary of the Reserve Bank of India (RBI).

Currently, each depositor in a bank is insured up to ₹5 lakh, covering both principal and interest amounts. This insurance applies to all commercial banks, regional rural banks, local area banks, and cooperative banks across the country.

Historical Background

1961: Following a series of bank failures in the 1950s, the Deposit Insurance Corporation Act was enacted.
1962: The Deposit Insurance Corporation (DIC) began operations — the first such scheme in Asia.
1978: It merged with the Credit Guarantee Corporation of India (CGCI) to form the DICGC, expanding its mandate to include credit guarantees.
2020: After the PMC Bank crisis, the insurance cover was raised from ₹1 lakh to ₹5 lakh.
2021: The law was amended to ensure depositors receive insured funds within 90 days of a bank being placed under moratorium.

Institutional Structure

Ownership: 100% owned by the Reserve Bank of India.
Headquarters: Mumbai.

Governing Board:
- Chairperson (appointed by RBI)
- One RBI Deputy Governor
- Government representatives
- Members from commercial and cooperative banking sectors

The DICGC collects premiums from banks — currently ₹0.12 per ₹100 of deposits — and maintains an insurance fund to pay claims arising from bank failures.

Reforms and Contemporary Issues

1. Uniform Premiums:
At present, all banks pay the same insurance premium rate, irrespective of their financial health. This causes efficient banks to subsidise riskier institutions.
Proposed Reform: Introduce a risk-based premium system that links premium rates to a bank’s stability, capital adequacy, and governance standards.

2. Excess Surplus:
The DICGC has built up large surpluses due to minimal bank failures and steady premium collection. Rationalising these rates could help reduce the cost of banking and improve efficiency.

3. Coverage Expansion:
The current ₹5 lakh coverage secures around 98% of all deposit accounts in India. While further hikes may not be essential, improvements in claim settlement speed and risk differentiation are needed.

4. Global Alignment:
Most developed countries employ risk-based premium models. Adopting similar practices in India would enhance efficiency, accountability, and global comparability.

Significance

Deposit insurance is vital for maintaining public confidence and financial stability. It safeguards depositors, encourages inclusive banking, and reinforces trust in the financial system. With continued reforms, India can enhance its deposit protection framework, reduce systemic risks, and align with global best practices in banking risk management.