Modi govt’s big decision! Depositors to get coverage of up to Rs 5 lakh if bank fails

The Union Cabinet has approved amendment to the Deposit Insurance and Credit Guarantee Corporation (DICGC) Act, 1961 that will provide account holders access to up to Rs 5 lakh funds within 90 days of a bank coming under moratorium. The amendment is in line with Finance Minister Nirmala Sitharaman’s Budget speech wherein she had announced that changes will be made to the DICGC Act, 1961. The Bill is expected to be introduced in the monsoon session.

Last year, the government raised insurance cover on deposit five-fold to Rs 5 lakh to provide support to depositors of ailing lenders like Punjab and Maharashtra Co-operative (PMC) Bank. Following the collapse of PMC Bank, Yes Bank and Lakshmi Vilas Bank too came under stress, leading to restructuring by the RBI and government.

Once the Bill becomes law, it will provide immediate relief to thousands of depositors, who had their money parked in stressed lenders such as PMC Bank and other small cooperative banks.

As per the current provisions, the deposit insurance of up to Rs 5 lakh comes into play when the licence of a bank is cancelled and the liquidation process starts.

DICGC, a wholly-owned subsidiary of the Reserve Bank of India, provides insurance cover on bank deposits. Deposit Insurance Credit Guarantee Cooperation (DICGC) insures all bank deposits, such as savings of fixed or current deposits or recurring deposits, and it covers all commercial banks, including foreign bank branches in India.

With the proposed amendment, each account holder's deposit in banks is insured up to a maximum of Rs 5 lakh, for both principal and interest.

At present, it takes 8-10 years for depositors of a stressed bank to get their insured money and other claims. The first 45 days will go for the bank, which has come under stress, to collect all the accounts where the claims will have to be made, and then it will be given to this insurance company, which in real-time will check it all up, and nearer the 90th day, depositors will get the money

Every bank used to pay 10 paise as an insurance premium per Rs 100 of deposit. It is to be noted that the enhanced deposit insurance cover of Rs 5 lakh is effective from February 4, 2020. The increase was done after a gap of 27 years as it has been static since 1993.