Have you ever imagined a situation where your trusted bank suddenly fails and all your money is gone? While this is the worst nightmare coming true for almost each and every individual on the planet, things are certainly better placed in India at the moment. Deposit insurance in case of failure of a bank was previously at Rs. 1 lakh and this was being debated for a long time after the issues witnessed at PMC (Punjab and Maharashtra Cooperative Bank). The Central Government has now proposed to hike the threshold for insurance of individual deposits to a more reassuring sum of Rs. 5 lakh.
According to experts, this could be a major confidence booster and just what people need to restore their faith in the banking system. Let it suffice to say that the RBI and Government have always worked to ensure that no bank fails completely or lets down customers in a painful manner. This new move thus comes as a welcome development for Indians all across the nation.
More details on the new proposal
As part of her speech for the Union Budget 2020-21, Union Finance Minister Nirmala Sitharaman has stated that the insurance for deposits in case of a bank failure will be scaled up to Rs. 5 lakh from Rs. 1 lakh earlier. She also added that depositors should know that their deposits remain completely safe since the Government has an effective framework in place for tracking the health of all SCBs (scheduled commercial banks) in the country.
This decision is a landmark one post the folding up of PMC which led to limitations for withdrawing deposits. As per the RBI’s own report, there were approximately Rs. 14,100 crore in cumulative claims for defaulting cooperative banking institutions received by the Deposit Insurance and Credit Guarantee Corporation. The latest move is thus a huge confidence booster for citizens in the present scenario and has been lauded by industry experts. They also feel that the Reserve Bank of India (RBI) has been successfully managing things in a manner that no scheduled commercial bank really winds up. Whenever there is an issue, mergers or other solutions are implemented for solving the problem at hand.
The insurance coverage of Rs. 1 lakh for deposits has been present from the year 1993 onwards. This is paid to the depositor in case the bank is fully liquidated. Between the years 1993 and 2019, the deposit amounts and depositor base have both gone up throughout the country’s banking system. 92% of accounts are completely protected as per reports in the country. From the year 2005 onwards, banks have been paying up a premium of 10 paisa for every Rs. 100 of deposits for maintaining the coverage amount of Rs. 1 lakh for every depositor. With this new announcement, banks will have to scale up this premium payment.
This could eventually be passed onto customers in some way although none will dispute the same. This move by the Government will lead to higher confidence amongst customers in small finance banks, private sector banks and cooperative banks. According to experts, this move will lead to an increase in insured deposits throughout the country in these institutions. What reports also highlight that the hike in deposit insurance to Rs. 5 lakh takes India to one of the highest global positions for deposit insurance per capita income after the United States and Brazil. As a result, it will naturally be a major boost in confidence for depositors across the nation and revitalize the banking sector as well.