Government Plans to Increase Bank Deposit Insurance Coverage

Why in the news?

The government is considering raising the deposit insurance limit beyond ₹5 lakh to enhance depositor protection. This follows RBI’s restrictions on New India Co-operative Bank due to governance concerns, highlighting the need for stronger financial security measures.

Government Plans to Increase Bank Deposit Insurance Coverage

Government’s Plan for Deposit Insurance:

  • The Indian government is considering raising deposit insurance beyond the current ₹5 lakh limit, according to Financial Services Secretary M. Nagaraju.
  • Deposit Insurance and Credit Guarantee Corporation (DICGC), a division of RBI, provides coverage to safeguard depositors.
  • The proposal is under active consideration, and the government will notify changes once approved.

RBI’s Action Against New India Co-operative Bank:

  • RBI imposed restrictions on the Mumbai-based New India Co-operative Bank due to poor governance and supervisory concerns.
  • Actions include:
    • Superseding the Board of Directors for 12 months.
    • Prohibiting new loans, fresh deposits, and investments without RBI’s approval.
    • Restrictions effective February 13, 2025, for six months.
  • The bank operates 30 branches across Maharashtra and Gujarat, with ₹2,436 crore in deposits.

Deposit Insurance Coverage and Need for Revision:

  • DICGC insures deposits (savings, fixed, current, and recurring) up to ₹5 lakh per depositor in commercial and cooperative banks.
  • In case of bank failure, eligible depositors must submit claims to the bank for reimbursement.
  • Coverage has been increased six times, with the last revision in 2020 from ₹1 lakh to ₹5 lakh after the Punjab & Maharashtra Co-operative Bank crisis.
  • Experts argue that higher coverage will enhance public trust in banking and protect more depositors in case of failures.