Budget 2020 met depositors’ demand to hike deposit insurance, which is now up at ₹5 lakh from ₹1 lakh, in the wake of the Punjab and Maharashtra Cooperative Bank crisis. However, there is confusion about its implementation—several people have voiced their concerns on social media about when the cover would kick in and what will happen if a depositor holds multiple accounts with a bank. We answer some of the common questions related to deposit insurance.
When do you get it?
Deposit insurance comes into play under two situations. One, if your bank goes into liquidation and two, if your bank is reconstructed or merged with another bank.
“The Deposit Insurance and Credit Guarantee Corp. (DICGC) does not directly deal with the depositors of failed banks. In the event of a bank’s liquidation, a depositor-wise claim list is prepared and sent to DICGC for scrutiny and payment by the liquidator," said Adhil Shetty, CEO, BankBazaar, an online financial services marketplace. DICGC then pays the money to the liquidator who is liable to pay the depositors.
In case of merger of banks, the amount due to each depositor is paid to the transferee bank. However, this is applicable only when a stressed bank is merged with another.
How it plays out
Deposit insurance covers the principal and interest up to ₹5 lakh. For example, if your principal deposit was ₹95,000 and you accrued an interest of ₹4,000 on it, the total amount insured would be ₹99,000. On the other hand, if the principal was ₹5 lakh, then the accrued interest will not be insured.
However, how the cover works will also depend on the number of accounts you have in the same bank or multiple banks.
When you have multiple accounts: Suppose you have three accounts with the same bank—savings, fixed deposit and recurring accounts—in the same or three different branches, you will get an overall cover of ₹5 lakh only. “In such a situation, the deposits kept in different branches of a bank are aggregated for the purpose of insurance cover and the maximum you would be eligible for is ₹5 lakh in all," said Shetty.
When you have a joint account: A joint account is considered a single entity and irrespective of the number of holders, it gets a ₹5 lakh cover. Even when you hold two or more joint accounts with the same person and with the first and second holders in the same order, then you will get ₹5 lakh in total for the two joint accounts, said Shetty.
When you have accounts in different banks: If you have accounts in two different banks and both go bust one after another, then the funds from both banks will be eligible for a cover of ₹5 lakh each. However, Shetty said, this is a far-fetched thought because practically no scheduled commercial bank in India has collapsed since 1960.
Note that DICGC is a subsidiary of the Reserve Bank of India. All scheduled commercial banks, including branches of foreign banks functioning in India, regional rural banks, and co-operative banks are insured by DICGC. However, the premiums for deposit insurance is borne entirely by the insured bank.