Deposit insurance demystified

With the government actively considering raising the insurance cover for bank deposits, here's a deep dive into how the coverage currently works

- RAGHU MOHAN

After the blowout at the Mumbai-based New India Cooperative Bank, the spotlight is once again on bank deposit insurance. M Nagaraju, Secretary, Department of Financial Services, has said this coverage is under review.

Some speculation suggests a hike to ₹15 lakh may be in the offing from the current ₹5 lakh. However, not many are familiar with the finer aspects of deposit insurance, and even fewer understand the role of the executing agency, the Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the Reserve Bank of India (RBI).

For instance, the bank deposit insurance limit of ₹5 lakh is inclusive of both the principal and the accrued interest. This means that if the principal amount was ₹5 lakh, that is all you will receive if a bank collapses—not the interest component. Banks also have the right to set off their dues from the insured deposit sum payable to you.

From a risk perspective, it is better to spread your deposits across multiple banks, given the extent of the current deposit cover. Similarly, if joint accounts are held in the same bank in different order, then for each account, the insurance cover will be available separately, up to ₹5 lakh per joint account where the names appear in a different sequence, points out Ravi Bhadani, partner at SNG & Partners (insurance and funds practice).

These blind spots have implications for investors, especially those who have parked their savings primarily in bank deposits.