8/3/2019 Insurance of Bank Deposits

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JVIRAHYAS@GMAIL.COM

INSURANCE OF BANK DEPOSITS

An important feature of Indian banking is that deposits of the public with the banksare insured up to the limit of Rs.1 lakh in each account. After the failure of the PalaiCentral Bank, a scheduled bank of South India in 1960, the Government and the

Reserve Bank felt the necessity of insuring the deposits in banks so that publicconfidence in the banking institutions is not shaken whenever any bank failed. TheDeposit Insurance Corporation of India was established by an Act of Parliament toinsure deposits in banks and the scheme of deposit insurance was introduced witheffect from January 1, 1952. The Corporation was renamed as Deposit Insurance andCredit Guarantee Corporation with effect from July 15, 1978.

Salient Features of Deposit Insurance

(i) The scheme of deposit insurance applies to all commercial banks in India,scheduled and non-scheduled. The deposit insurance cover has beenextended to co-operative banks also in 21 States and 3 Union Territories. TheRegional Rural Banks have also been included in this scheme. All these banks

are called insured banks.

(ii) The insurance cover is extended to all deposits with the insured banksexcept the deposits of the Central and State Governments, foreignGovernments and the commercial banks.

(iii) The deposits with the insured banks are insured up to a special limit only.The insurance cover is available in respect of all unpaid balances due to adepositor held in a bank in the same capacity and in the same right up to Rs.1lakh. This means that every account of a depositor in every insured bank isinsured to the extent of Rs.1 lakh. The accounts with credit balance up to Rs.1lakh each are called fully protected accounts.

(iv)The Corporation reimburses depositors in case the insured bank fails or isamalgamated with another bank and defaults in paying fully the balances dueto the depositors in cash or by crediting the same to the full extent in thebooks of the transferee bank (upto a limit of Rs. 1 lakh per account. Thedifference between the amount so paid or credited and the limit of insurancecover per account is paid by the Corporation. For example, if bank X, on itsmerger with bank Y, gives a credit equal to 75% of the deposit, a depositorhaving a credit balance of Rs.10,000 will get credit of Rs.7,500. The balance ofRs.2,500 will be reimbursed to him by the Corporation.

(v) The rate of insurance premium is 5 paise per annum for every hundredrupees of assessable deposits. It is payable by the insured banks and not bythe depositors at half-yearly intervals. Assessable deposits are those depositsto which the cover of insurance is extended under (ii) above. Premium is thuspayable on total assessable deposits whereas the insured deposits are thosewhich are below the limit of insurance cover, i.e., Rs. 1 lakh in each account.

The Corporation maintains two funds : (a) Deposit Insurance Fund, and (b)General Fund. The income from insurance premia is credited to the DepositInsurance Fund and is invested in Central Government securities. Incomefrom such investments is credited to and the insurance losses are debitedto the Revenue Account of the Fund. The General Fund meets all otherexpenses of the Corporation.