Protecting the deposits made by people in banks is very important to ensure confidence in the banking system. In Most countries, the common form of providing safety to depositors is deposit insurance. Deposit insurance is providing insurance protection to the depositor’s money by receiving a premium. After the global financial crisis of 2008, deposit insurance again got attention with the failure of the US’s Silicon Valley Bank in March 2023.
With deposit insurance, when the bank fails, the depositors will get back their money. Insurance to deposits will be provided up to a limit. For getting the deposit insurance protection, the depositors should pay an insurance premium.
| What is deposit insurance?
Deposit insurance is a protection cover available for bank depositors if the bank fails financially and go for liquidation. In India, the deposit insurance activity is done by an RBI subsidiary called Deposit Insurance Corporation. All types of deposits like savings deposits, term deposits and RDs are covered by DICGC. Some selected deposits especially by institutions are not covered. Deposits of all banks (except primary cooperative societies) up to Rs 5 lakh is covered. |
The first deposit insurance scheme was the Federal Deposit Insurance Corporation (FDIC), launched in the US during the Great Depression period when many banks failed, and depositors lost their money. The FDIC was established in 1933 to restore public confidence in the US financial system and to protect small depositors. In 2023, the FDIC’s deposit insurance protection to depositors of Silicon Valley Bank was instrumental in reinstating confidence in the banking system.
As a follow up to the initiatives of the FDIC in the early part of the 20th century, several central banks set up deposit insurance institutions especially after 1960s. According to the International Association of Deposit Insurance (IADI) as of March 19, 2023, 146 countries have deposit insurance schemes.
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How the US authorities intervened after the collapse of the SVB? After the crisis of the Silicon Valley Bank (SVB), the Federal Deposit Insurance Corporation (FDIC) in the US, intervened to protect the depositor’s interest. The SVB was closed by the California Department of Financial Protection and Innovation on March 10, 2023, and the FDIC was appointed as the receiver. FDIC transferred all assets and deposits—both insured and uninsured-of the SVB, to a newly created, FDIC-operated ‘bridge bank’ under Silicon Valley Bridge Bank, N.A. In the same way, for providing deposits back to the customers, the FDIC created the Deposit Insurance National Bank of Santa Clara (DINB). At the closure, the FDIC transferred all the insured deposits of the SVB to the DINB. As per the restructuring plan, depositors were provided full access to their money which is placed under the bridge bank. With the transfer of the bank’s portfolio to the newly created entity, the depositors and borrowers will automatically become customers of Silicon Valley Bridge Bank, N.A. Similarly, they will get access to their funds through ATM, debit cards, and writing checks etc. Cheque facilities of SVB will be continuously supported. For loan takers, the loans repayments can be done as usual. According to the FDIC, no losses associated with the winding up of Silicon Valley Bank will be borne by taxpayers. At the same time, shareholders and certain unsecured debt holders of SVB will not be protected. The senior management has been removed by the US authorities after the failure of the bank. The FDIC clarified that any losses to the Deposit Insurance Fund to pay back uninsured depositors will be recovered by a special assessment on banks. |
Deposit Insurance in India
In India, the deposit insurance was started with the launch of the Deposit Insurance Corporation and Credit Guarantee Corporation (DICGC) of India in 1961.
DICGC is fully owned by the RBI. Deposit insurance is mandatory for all banks. The premium charged is on a flat rate basis which is 10 paise per Rs 100. The amount of coverage is presently limited to Rs 5 lakh. This change was made under buget 2020.
A Deposit Insurance Fund (DIF) is built up from the premium received from insured banks and the coupon received from investment in central government securities.
Deposit insurance extended by DICGC covers all commercial banks, including Local Area Banks (LABs) and Regional Rural Banks (RRBs) in all the States and Union Territories (UTs). All Co-operative Banks across the country except three UTs of Lakshadweep, Chandigarh, and Dadra and Nagar Haveli are also covered by deposit insurance.
In the event of a bank failure, DICGC protects bank deposits that are payable in India. The DICGC insures all deposits such as savings, fixed, current, recurring, etc.
Institutions covered under deposit insurance
- All commercial banks including PSBs, Private Sector Banks, Regional Rural Banks, Local Area Banks, branches of foreign banks functioning in India, Small Finance Banks and Payment Banks.
- All Co-operative Banks: State Cooperative Banks, Central Cooperative banks, UCBs or Primary Cooperative Banks (Urban Coopera-tive banks are also called as Primary Cooperative Banks). (Deposits of Primary Cooperative Credit Societies are not covered under Deposit Insurance).
But those in three UTs of Lakshadweep, Chandigarh, and Dadra and Nagar Haveli are not covered by deposit insurance. Primary cooperative societies are not insured by the DICGC. NBFCs are also not covered under deposit insurance.
What types of deposits are not insured by the DICGC?
The following types of deposits are not covered under deposit insurance by DICGC
(i) Deposits of foreign Governments;
(ii) Deposits of Central/State Governments
(iii) Inter-bank deposits;
(iv) Deposits of the State Land Development Banks with the State co-operative bank;
(v) Any amount due on account of any deposit received outside India
(vi) Any amount, which has been specifically exempted by the corporation with the previous approval of Reserve Bank of India.
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