Bank Deposit Protection Cover from DICGC

Banks do fail. And when a bank fails, the only respite a depositor has is the insurance cover offered by the Deposit Insurance and Credit Guarantee Corporation (DICGC). Know in depth of this insurance, and how to get smarter and get covered for more than the standard insurance of INR 5 lacs...

Introduction

The interest rates are low, and the investors are getting lured into investing in new banks or NBFCs or even cooperative banks considering the higher interest rates they offer. Is the money safe in such banks? If yes, up to what amount? What if the bank fails, like we saw in the case of Yes Bank and PMC Bank last year?

Deposit Insurance and Credit Guarantee Corporation (DICGC)

DICGC is a wholly owned subsidiary of the Reserve Bank of India, and it does provide a degree of protection to investors in such dire cases like a bank collapse.

How does the deposit insurance work

As per the DICGC guidelines, each depositor in a bank is insured up to a maximum of Rs 5 lacs for both principal and interest amounts together, held by her/him in the same right and same capacity as on the date of liquidation/cancellation of the bank's license or the date on which the scheme of amalgamation/merger/reconstruction comes into force.

This is a risk coverage provided by DICGC, assuming that the banks continue to pay premiums for this policy every year.

How much is the insurance cover for every depositor

All your accounts held in the same right and capacity whether savings or current account, FD or RD, will be clubbed, and you will get only a total insurance cover of Rs 5 lacs. This amount includes both principal and the accumulated interest amount.

So, if your principal amount is Rs 5 lacs, then you will only get this amount back and not the accumulated interest on the deposits if the bank fails. However, if the principal and accumulated interest taken together is Rs 5 lacs or less, you will get the total amount back in claim if the bank fails.

Therefore, it is better to go by maturity amount of the deposits while calculating the insurance cover. Nevertheless, if you have a non-cumulative deposit, where you regularly earn interest, then you can keep the principal amount of around Rs 5 lacs as well.

Is INR 5 lacs cover enough

The cover for depositors money was increased from Rs. 1 lacs to Rs. 5 lacs in April 2020. But in today's inflationary world, even a Rs. 5 lacs cover may not be big enough for most investors. Is there a way that an investor can opt for higher insurance cover? 

One of the ways is to go to another bank once your Rs. 5 lacs limit is exhausted. In each bank, you are separately covered to a maximum of Rs. 5 lacs. But this leads to fund management issues on the investor's side, especially if the amount to be invested is high. 

Is there any other way to increase the cover within the same bank? Well, there is a workaround available. If you hold deposits in different rights and capacities, each of your deposits will enjoy a cover of Rs 5 lacs separately in the same bank.

As an example, you can open fixed deposits in the same bank, but in different rights and capacity. e.g. if you open a fixed deposit in same bank as a joint holder with your spouse, brother or children, or you open a FD as a partner of a firm, guardian of a minor and so on, then all these FDs will be considered as held in different capacity and different right, and each account will have the insurance cover up to Rs 5 lacs separately.

So, if you want to make an FD of Rs 10 lacs in a bank which is offering better interest rate than another bank, you may invest Rs 2.5 lacs in FD as an individual investor, Rs 2.5 lacs each as joint investor with your spouse and child where you are the first holder, another deposit of Rs 2.5 lacs as a joint investor with your spouse (here your spouse should be the first holder). By doing so, all your FDs will be treated as separate accounts and each one will be insured for up to Rs 5 lacs each.

Here is an illustration that might help you.

Which financial institutions NOT covered by DICGC

All commercial banks, including branches of foreign banks functioning in India, local area banks and regional rural banks are insured by the DICGC. At present all co-operative banks are also covered by the DICGC. 

However, key institutions that are NOT covered, include:

1/ Deposits in primary cooperative societies (e.g. Amul)
2/ Deposits in any NBFC (Non Banking Financial Company e.g. Bajaj Finance) or HFC (Housing Finance Company e.g. SBI Housing Finance).
3/ Deposits in corporate entities (Corporate Deposits e.g. in any company)

Is your bank is insured by the DICGC

The DICGC, while registering the banks, as insured banks furnishes them with printed leaflets for display giving information relating to the protection afforded by the Corporation to the depositors of the insured banks. In case of doubt, depositor should make specific enquiry from the branch official in this regard.

Who pays the cost of deposits insurance

Neither RBI not the DICGC pays for this insurance cover. Deposit insurance premium is borne entirely by the insured bank. Therefore, smaller banks may try to cut costs by not paying for this insurance cover. It makes all the sense to seek specific evidence of continued insurance before investing your hard earned money.

When is DICGC liable to pay

If a bank goes into liquidation, DICGC is liable to pay to the liquidator the claim amount of each depositor up to Rupees five lacs within two months from the date of receipt of claim list from the liquidator. The liquidator has to disburse the claim amount to each insured depositor corresponding to their claim amount.

Can the DICGC withdraw deposit insurance coverage from any bank?

The Corporation may cancel the registration of an insured bank if it fails to pay the premium for three consecutive periods. In the event of the DICGC withdrawing its coverage from any bank for default in the payment of premium the public will be notified through newspapers. 

Some useful links

List of currently insured banks: https://www.dicgc.org.in/FD_ListOfInsuredBanks.html

DICGC Website: https://www.dicgc.org.in/

What about the banks outside India

Every country's federal bank has their own system of insuring investor's interests. As an example, in US, FDIC protects your money in the unlikely event of a bank failure. 

The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. And you don’t have to purchase deposit insurance. If you open a deposit account in an FDIC-insured bank, you are automatically covered. 

Similar arrangements are there in each country. So, depending on where your bank is, you need to find out if you are covered and for how much.

Summary

If you are investing in main streamline banks like HDFC Bank, ICICI Bank or SBI as an example, then you can be reasonably assured that they are covered under the DICGC insurance. In case you decide to move to cooperative banks and smaller banks, the risk to your principal amount gets higher, and therefore, it is better to seek specific evidence of their continued insurance cover before investing any amount with them. 
Most of us have accounts of our spouses, children and family members within the same bank. Making use of the 'different rights and capacities' clause, you can potentially increase your Rs. 5 lacs cover to as high as 20-30 lacs. Make use of it, as long as it lasts.

Regards

Manoj Arora
Official Website