The Financial Services Secretary confirms that increasing the deposit insurance limit is under active consideration following regulatory action against New India Cooperative Bank.
Government Reviewing Higher Deposit Insurance Coverage
The Government of India is actively considering raising the insurance cover limit on bank deposits, which currently stands at Rs 5 lakh per depositor, Financial Services Secretary M Nagaraju announced on Monday.
The development comes in response to recent regulatory action taken by the Reserve Bank of India (RBI) against Mumbai-based New India Cooperative Bank, which has led to concerns over depositor protection.
RBI’s Action Against New India Cooperative Bank
Last week, the RBI imposed strict restrictions on New India Cooperative Bank, citing poor governance standards and supervisory concerns. As part of the measures, the bank’s Board of Directors was superseded for 12 months.
New India Cooperative Bank, which has a network of 30 branches and deposits worth Rs 2,436 crore (as of March 2024), has been struggling financially. The bank reported losses of Rs 22.78 crore in 2023-24 and Rs 30.74 crore in 2022-23. Following the RBI’s action, depositors have been rushing to withdraw their funds, leading to growing calls for stronger depositor protection measures.
Government’s Position on Increasing Deposit Insurance
When asked about the possibility of increasing the Rs 5 lakh per depositor insurance cover, Financial Services Secretary M Nagaraju stated:
“On the point about increasing deposit insurance, that is under active consideration. As and when the government approves, we will notify it.”
However, he refrained from commenting further on the RBI’s handling of the New India Cooperative Bank case, as the regulator is currently managing the situation.
Understanding Bank Deposit Insurance in India
Currently, each bank depositor is insured up to Rs 5 lakh, which includes both the principal and interest amounts held in a bank. This insurance applies in cases where:
- A bank goes into liquidation
- Its licence is cancelled
- It is subject to amalgamation, merger, or reconstruction
The insurance cover is provided by the Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the RBI, which is responsible for safeguarding depositor funds in case of a bank failure.
Potential Impact of an Increased Insurance Limit
If the government raises the deposit insurance coverage, it would provide:
- Stronger financial security to bank depositors, especially in cooperative banks and smaller financial institutions.
- Increased confidence in the banking system, ensuring stability in the face of bank failures.
- Better risk management for depositors who hold savings beyond Rs 5 lakh.
The last revision to deposit insurance occurred in 2020, when the coverage was raised from Rs 1 lakh to Rs 5 lakh following the crisis at Punjab and Maharashtra Cooperative (PMC) Bank.
Future Outlook: What to Expect?
With the government actively considering an increase in deposit insurance, an official decision is expected after internal assessments and approvals. The move could significantly impact India’s banking stability and depositor confidence, particularly for those with funds in cooperative and smaller banks.
For more updates on deposit insurance reforms and banking regulations, stay tuned.
