First, the Silicon Valley Bank, then the Signature Bank. The back-to-back collapses of these two major banks in the US recently have created panic among their depositors, who are concerned about their hard earned money. Some Indian startups too are believed to have exposure to SVB. Are you aware of what happens when such a bank collapse occurs in India? Read on as we explain what happens to your deposits and to what extent they are insured in the...Read More
Vanya GautamUpdated: Mar 15, 2023, 16:51 IST
8 min read
First, the Silicon Valley Bank, then the Signature Bank. The back-to-back collapses of these two major banks in the US recently, about 15 years after Lehmann Brothers and many other US entities collapsed, have created panic among their depositors, who are concerned about their hard-earned money. Some Indian startups too are believed to have exposure to SVB.
US President Joe Biden, though, has tried to calm the nerves by assuring that people’s money is safe. Even the Treasury Department, the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC) have assured in a joint statement that no losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.
But are you aware of what happens when such a bank collapse occurs in India?
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Read on as we explain what happens to your deposits and to what extent they are insured in the event of bank failure.
Are Your Bank Deposits Insured?
DICGC (Deposit Insurance and Credit Guarantee Corporation), a subsidiary of the RBI, offers insurance cover for deposits opened with scheduled banks. As per the insurance program, cumulative bank deposits, which include fixed deposits, savings accounts, recurring deposits, and current accounts, are insured up to Rs 5,00,000 per bank and depositor in the event of bank failures. Here, both the interest as well as the principal component are insured under DICGC coverage.
Now, as the Rs 5 lakh cover per bank per depositor applies separately to the deposits held in each bank, you can distribute your FD investments, savings accounts, and other deposits across multiple banks in such a manner that their cumulative deposits with each bank do not exceed the Rs 5,00,000 mark. This will ensure all your deposits in different banks remain covered under the insurance.
Also Read: Higher Interest Rates On Both FD and Savings Accounts By Small Finance Banks! Are They Safe?
FAQs regarding DICGC’s insurance on bank deposits in India
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1. Which banks are insured by the DICGC?
Commercial Banks: All commercial banks, including branches of foreign banks functioning in India, local area banks, and regional rural banks, are insured by the DICGC.
Cooperative Banks: All state, central, and primary cooperative banks, also called urban cooperative banks, functioning in states or union territories that have amended the local cooperative societies act, empowering the Reserve Bank of India (RBI) to order the Registrar of Cooperative Societies of the state or union territory to wind up a cooperative bank or to supersede its management committee, and requiring the Registrar not to take any action regarding the winding up, amalgamation, or reconstruction of a cooperative bank without prior sanction in writing from the RBI, are covered under the Deposit Insurance Scheme.
At present, all cooperative banks are covered by the DICGC. As per the DICGC website, primary cooperative societies are not insured by the DICGC.
2. What does the DICGC insure?
The DICGC insures all deposits, such as savings, fixed, current, recurring, etc. deposits, except the following types of deposits:
-Deposits of foreign governments
-Deposits of Central and State Governments
-Inter-bank deposits
-Deposits of the State Land Development Banks with the State Co-operative Bank
-Any amount due on account of a deposit received outside India
-Any amount that has been specifically exempted by the corporation with the previous approval of the Reserve Bank of India
Also read: How Risky Is Investing In A Bank Fixed Deposit?
3. What is the maximum deposit amount insured by the DICGC?
Each depositor in a bank is insured up to a maximum of Rs 5,00,000 (Rupees Five Lakhs) for both principal and interest amounts held by him in the same right and same capacity as on the date of liquidation or cancellation of the bank's licence or the date on which the scheme of amalgamation, merger, or reconstruction comes into force.
4. How will you know whether your bank is insured by the DICGC or not?
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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, depositors should make specific inquiries from the branch official in this regard.
5. Are the principal and interest amounts both insured by DICGC?
The DICGC insures principal and interest up to a maximum amount of Rs. 5 lakhs. For example, if an individual had an account with a principal amount of 4,95,000 plus accrued interest of 4,000, the total amount insured by the DICGC would be 4,99,000, as per the DICGC website.
If, however, the principal amount in that account was Rs. 5 lakhs, the accrued interest would not be insured, not because it was interest but because that was the amount over the insurance limit.
6. Are deposits in different banks separately insured?
Yes. If you have deposits with more than one bank, the deposit insurance coverage limit is applied separately to the deposits in each bank.
7. If two banks are closed on the same day, are my funds added together, or insured separately?
Your funds from each bank would be insured separately, regardless of the date of closure.
8. Can the bank set off their due by deducting the amount of dues payable by depositor?
Yes. Banks have the right to deduct their dues from the amount of deposits as of the cut-off date. The deposit insurance is available after the netting of such dues.
9. Who pays the cost of deposit insurance provided by DICGC?
Deposit insurance premium is borne entirely by the insured bank.
10. In which case is DICGC liable to pay?
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If a bank goes into liquidation, DICGC is liable to pay to the liquidator the claim amount of each depositor up to Rs 5 lakhs within two months from the date of receipt of the claim list from the liquidator. The liquidator has to disburse the claim amount to each insured depositor corresponding to their claim amount."
If a bank is reconstructed or amalgamated with anot her bank, the DICGC pays the bank concerned the difference between the full amount of deposit or the limit of insurance cover in force at the time, whichever is less, and the amount received by him under the reconstruction or amalgamation scheme within two months from the date of receipt of the claim list from the transferee bank or Chief Executive Officer of the insured bank or transferee bank, as the case may be."
11. Does DICGC directly deal with the depositors of failed banks?
No. In the event of a bank's liquidation, the liquidator prepares a depositor-wise claim list and sends it to the DICGC for scrutiny and payment. The DICGC pays the money to the liquidator, who is liable to pay the depositors. In the case of an amalgamation or merger of banks, the amount due to each depositor is paid to the transferee bank.
12. Can the DICGC withdraw or discontinue deposit insurance coverage from any bank?
DICGC 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.
Registration of an insured bank stands cancelled if the bank is prohibited from receiving fresh deposits; or its licence is cancelled or a licence is refused to it by the RBI; or it is wound up either voluntarily or compulsorily; or it ceases to be a banking company or a co-operative bank within the meaning of Section 36A(2) of the Banking Regulation Act, 1949; or it has transferred all its deposit liabilities to any other institution; or it is amalgamated with any other bank; or a scheme of compromise, arrangement, or reconstruction has been sanctioned by a competent authority and the said scheme does not permit acceptance of fresh deposits.
According to the DICGC website, if a bank's registration is cancelled, the bank's deposits are still insured until the date of cancellation.
Also Read: PPF vs. ELSS vs. Tax Saver Bank FD
13. What will DICGC's liability to the banks on de-registration be?
DICGC has deposit insurance liability on liquidation, etc. of "insured banks," i.e., banks that have been de-registered (a) on account of prohibition on receiving fresh deposits or (b) on account of cancellation of licences or because it is found that a licence cannot be granted. The liability of DICGC in these cases is limited to the extent of deposits as of the date of cancellation of the bank's registration as an insured bank.
On the liquidation, etc., of other de-registered banks, i.e., banks that have been de-registered on other grounds such as non-payment of premium or their ceasing to be eligible co-operative banks under Section 2(gg) of the DICGC Act, 1961, the Corporation will have no liability.
Also Read: Explained: How Banks Calculate Interest When You Break Your FD
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