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The government is considering a proposal to raise the deposit insurance limit from Rs 5 lakh to Rs 10 lakh. This move is intended to help boost depositor confidence, especially after the recent collapse of the New India Cooperative Bank. However, this proposal has raised concerns from well-capitalized banks, who argue that the higher premiums might unfairly impact them.
The issue of raising deposit insurance limit gained attention after the New India Co-operative Bank collapsed in February 2025. This smaller cooperative bank faced financial mismanagement, leaving depositors in a vulnerable position. The incident highlighted the risks for depositors, particularly in smaller banks where the safety of their money is often uncertain. This collapse echoed the PMC Bank crisis in 2019, when depositors struggled to access their funds after the bank was found to be hiding significant bad loans.
The PMC Bank crisis prompted the government to increase the deposit insurance coverage from Rs 1 lakh to Rs 5 lakh in 2020. However, the New India Co-operative Bank’s collapse has reignited the debate about whether this coverage is enough, leading the government to consider raising it further to Rs 10 lakh.
Currently, all banks in India contribute to a deposit insurance fund that covers up to Rs 5 lakh per depositor. If the coverage were to increase to Rs 10 lakh, all banks—regardless of their size or financial health—would have to pay higher premiums. This has sparked opposition from large public and private sector banks, which argue that they shouldn’t have to bear the extra cost, especially when their risk is much lower than that of smaller, weaker banks.
Banks pay a premium to DICGC, and if Banks default, then Rs.5 lakh is paid to bank customers. The Deposit Insurance and Credit Guarantee Corporation (DICGC) is a specialized division of the Reserve Bank of India (RBI) that provides deposit insurance to bank depositors, ensuring the safety of their money in the event of a bank failure.
These larger banks, which are financially stable and have strong capital buffers, believe that charging them higher premiums would be unfair. To address this concern, there have been discussions about a “Risk-Based Premium Model.” Under this approach, banks with higher risk profiles would contribute more to the deposit insurance pool, while safer banks would pay less.
As of April 2025, banks in India pay a deposit insurance premium of ₹0.12 per ₹100 of assessable deposits per annum to the Deposit Insurance and Credit Guarantee Corporation (DICGC).
Key Details on DICGC Premiums
- Premium Rate: ₹0.12 per ₹100 of assessable deposits annually (i.e., 0.12%).
- Payment Frequency: Semi-annually, at ₹0.06 per ₹100 of deposits for each half-year.
- Assessment Basis: Based on the total deposits as of the last day of the preceding half-year.
- Penal Interest: If a bank delays payment, it incurs a penal interest at 8% above the prevailing Bank Rate, calculated from the first day of the half-year until the payment date.
Premium Contributions by Bank Type (FY 2022–23)
| Bank Type | Premium Paid (₹ crore) | Share of Total Premium |
|---|---|---|
| Commercial Banks | 20,104 | 94% |
| Co-operative Banks | 1,277 | 6% |
| Total | 21,381 | 100% |
Notably, while commercial banks contribute the majority of the premiums, co-operative banks have historically accounted for a higher proportion of claims settled by the DICGC.
Risk of Deposit
Another issue raised in the debate is the potential for a moral hazard, particularly in the cooperative banking sector. The concern is that if the deposit insurance coverage is increased, depositors may become less cautious about where they deposit their money. With the belief that their deposits are fully insured, they might take risks by depositing their funds in banks offering high returns but with shaky financial stability. This could lead to more financial fraud and mismanagement, especially in the cooperative banking sector, which has experienced several collapses in recent years.
The failure of New India Co-operative Bank has highlighted how vulnerable depositors are in smaller banks, and experts warn that raising the deposit insurance limit could encourage riskier behavior, making the situation worse.
The government’s next steps will require careful consideration. While increasing the deposit insurance limit could give depositors more protection in case of bank failures, it’s important that the decision doesn’t place an unfair burden on well-capitalized banks or encourage risky financial practices. The introduction of a risk-based premium model may be a step in the right direction, ensuring that banks with higher risks pay a larger share of the cost.
As discussions continue, all eyes are on the government’s decision, which could have a big impact on India’s banking system. The collapse of New India Co-operative Bank has made it clear that there is a need for a stronger framework to protect depositors, especially in smaller banks where risks remain high.
