Government May Raise Deposit Insurance Limit Beyond ₹5 Lakh: Finance Minister Informs Parliament
The Indian government is considering increasing the deposit insurance limit beyond the current ₹5 lakh to strengthen trust in the banking system and provide greater security to depositors. Finance Minister Nirmala Sitharaman informed Parliament on Monday that the Deposit Insurance and Credit Guarantee Corporation (DICGC) may propose raising the limit based on its financial position and the overall stability of the banking sector.
Current Deposit Insurance Coverage
Under the DICGC Act, depositors are insured up to ₹5 lakh for all their accounts in a bank, including savings, fixed, current, and recurring deposits, provided they hold them in the same capacity. This coverage applies to all banks, including commercial banks, small finance banks, payment banks, regional rural banks, and co-operative banks at various levels.
The last revision in deposit insurance coverage took place on February 4, 2020, when the limit was raised from ₹1 lakh to ₹5 lakh with government approval. Sitharaman noted that as per Section 16(1) of the DICGC Act, the Corporation assesses its financial strength and the country’s banking system to decide on recommending a further increase in coverage.
Possible Increase in Deposit Insurance
The government is considering doubling the current deposit insurance coverage to provide additional security to depositors, especially senior citizens. If implemented, this move will address concerns about the safety of bank deposits. However, to compensate for the increased coverage, DICGC may slightly raise the insurance premium banks pay.
As of March 31, 2024, deposit insurance covered 97.8% of eligible accounts. The remaining 2.2% of accounts had balances exceeding the current limit of ₹5 lakh. In terms of deposit value, the insured deposit ratio (IDR) stood at 43.1%.
Impact on Banks and Profitability
The exact increase in the deposit insurance limit is not yet confirmed. However, according to a report by rating agency ICRA, if the IDR rises to between 47% and 66.5%, banks’ annual profit after tax could be negatively affected by ₹1,800 crore to ₹12,000 crore. This could lead to a 1-4 basis point (bps) reduction in return on assets (RoA) and a 7-40 bps drop in return on equity (RoE). If the insurance premium increases, the combined impact on RoA could be 3-7 bps, while RoE could decline by 27-68 bps.
The government is expected to carefully assess the financial implications before making a final decision on increasing deposit insurance coverage.
