Shivanand Pandit
In a major boost for term and savings account holders, the Reserve Bank of India (RBI) is reportedly considering an increase in the deposit insurance limit, currently fixed at ₹5 lakh. The revised coverage, extended through the Deposit Insurance and Credit Guarantee Corporation (DICGC) —a fully owned subsidiary of the RBI—is expected to receive approval shortly. Although the government has not yet made a final decision on revising the ₹5 lakh deposit insurance limit set five years ago, an official indicated that the new cap is likely to be set within the ₹10 lakh range.
The insurance provided by the DICGC covers all types of deposits—including savings and current accounts—held by customers in both commercial and cooperative banks. Deposits held across different branches of the same bank are combined for insurance purposes, with a maximum coverage limit of ₹5 lakh. However, if the deposits are held in different ownership categories or placed in separate banks, each would be insured separately.
Deposit insurance in India was first introduced in 1962, with an initial coverage limit of ₹1,500 per depositor. Over the years, this limit has been revised several times, increasing to ₹20,000 in 1976 and ₹30,000 in 1980. Since then, the limit has been changed only twice in the past 45 years: from ₹1 lakh in 1993 to ₹5 lakh on February 4, 2020, following the collapse of the Punjab and Maharashtra Co-operative Bank (PMC Bank), which impacted lakhs of depositors. As of March 31, 2024, nearly 98% of the 2.89 billion accounts in insured banks were fully protected under the ₹5 lakh insurance cap, according to DICGC data. However, this coverage extended to only 43.1% of the total assessable deposits, amounting to ₹2,18,23,481 crore on the same date. By the end of the financial year 2023-24, the DICGC, now 63 years old, had a Deposit Insurance Fund of ₹1,98,753 crore. During the year, it settled claims worth ₹1,436 crore for depositors of cooperative banks and received ₹23,879 crore in deposit insurance premiums. At that time, 1,997 banks were insured under DICGC, including 140 commercial banks and 1,857 cooperative banks.
Is raising the deposit insurance limit necessary?
The need to reassess and revise India’s deposit insurance limit has become increasingly urgent, especially in light of recent banking crises that have caused distress and hardship for countless depositors. One of the most striking examples occurred in 2019 when the RBI imposed severe restrictions on the PMC Bank following the discovery of serious financial irregularities. The abrupt freezing of accounts left thousands of depositors unable to access their own money. Many had deposits worth several lakhs of rupees, but under the prevailing rules, they were eligible for insurance coverage of only ₹5 lakh. For those whose entire savings were tied up in the bank, this cap offered little solace.
Similarly, during the crisis at Yes Bank in 2020, swift and coordinated intervention by the RBI and the central government was instrumental in averting a full-blown panic. Authorities took decisive action, including restructuring the bank and assuring depositors that their funds were safe. Without such intervention, the situation could have quickly spiralled into widespread chaos, putting millions of depositors at risk. These incidents have highlighted the vulnerabilities in the current deposit protection framework.
Beyond the high-profile cases of PMC Bank and Yes Bank, numerous small cooperative banks across the country have quietly collapsed over the years, often due to mismanagement, fraud, or weak governance. In many such instances, depositors—especially those in rural and semi-urban areas—have been left in limbo for years, struggling to recover their hard-earned savings. The process of reimbursement is not only slow but also emotionally and financially draining.
Given these developments, it is evident that the current insurance ceiling of ₹5 lakh is no longer adequate in today’s economic environment. Inflation has steadily eroded the real value of money, and household savings have grown in tandem with rising incomes and aspirations. For a typical middle-class family, especially one that prioritises financial prudence, fixed deposits in a single bank can easily exceed ₹10 lakh. Far from providing peace of mind, the current insurance cap often fuels anxiety, particularly among senior citizens, pensioners, and residents of smaller towns, for whom bank deposits represent a lifetime of disciplined savings and financial security.
Raising the deposit insurance limit is not just a financial reform—it is a moral and social imperative. A higher limit would provide meaningful protection to depositors and send an unambiguous message that the financial system values and safeguards public trust. Increasing the coverage to ₹10 lakh or ₹15 lakh would ensure that a vast majority of ordinary depositors are fully protected. Data from various banking sectors suggests that most retail customers have deposit balances within this range. Therefore, a higher limit would provide near-universal protection for retail depositors without disproportionately benefiting large institutional account holders.
Importantly, enhancing deposit insurance coverage would also help to restore confidence in cooperative banks, which continue to play a vital role in India’s banking ecosystem, especially in underserved and rural areas. These banks often serve as the primary financial institutions for local communities, and any signs of instability can cause disproportionate alarm. A robust insurance mechanism would go a long way in alleviating depositor fears and maintaining stability in this crucial sector.
While increasing the insurance cap may raise operational costs for banks in the form of higher insurance premiums, these should be viewed as a necessary investment in the long-term health of the financial system. The priority must always be the safety and security of depositors’ funds. Moreover, higher insurance coverage would likely reduce the need for emergency interventions during crises, thereby lowering systemic risk and potential costs to the exchequer in the long run. Revisiting and raising the deposit insurance limit is both timely and essential. It is a measure that directly addresses the concerns of the average Indian saver, enhances the credibility of the banking system, and reinforces the social contract between the state and its citizens. By ensuring that people’s money is truly safe, the government and regulators can strengthen the foundation of trust on which the entire financial system is built.
As policymakers deliberate on raising the deposit insurance limit, it is essential that they carefully consider multiple evolving factors, including the rapid technological adoption by customers and the lessons learned from recent global financial crises. The banking sector, by its very nature, is inherently fragile and exposed to liquidity risks. This fragility underscores the fundamental need for deposit insurance as a critical safeguard.
Banks operate by accepting deposits from customers, primarily short-term liabilities, and using these funds to extend loans or investments over longer time horizons. This maturity mismatch means that banks do not hold enough liquid cash to fulfil all withdrawal requests simultaneously. Consequently, if every depositor were to demand their funds at the same time—a scenario known as a “bank run”—even otherwise solvent banks would be unable to meet such demands. History has shown that even a mere rumour or fear of a bank’s insolvency can trigger actual runs, leading to rapid withdrawals that threaten the bank’s survival.
In this context, deposit insurance serves a vital role in maintaining public confidence and financial stability. By assuring depositors that their funds are protected up to a certain limit, deposit insurance discourages panic-driven withdrawals during periods of financial stress, thus preventing liquidity crises from escalating into systemic failures.
The landscape of banking and finance has changed dramatically with the widespread adoption of digital technologies. Customers today enjoy the convenience of instant fund transfers, round the clock, without needing to visit physical branches. While this technological advancement enhances customer experience, it also increases the risk of sudden liquidity pressures on banks during crises. Digital banking platforms enable rapid movement of money, which can accelerate the pace at which a bank run unfolds, leaving banks with less time to respond effectively.
Given these realities, it becomes increasingly important to significantly raise the deposit insurance limit to provide comprehensive protection for individual depositors against potential losses arising from bank failures. Enhanced deposit insurance coverage benefits not just the individual account holders by safeguarding their savings, but also contributes to the resilience and stability of the entire banking system. When depositors feel secure, the likelihood of panic-induced withdrawals diminishes, thereby reducing systemic liquidity risks.
The interconnected nature of today’s global financial system means that distress at one institution can quickly ripple through others, amplifying instability. The 2023 collapse of Silicon Valley Bank in the United States is a pertinent example. As fears of insolvency spread, regulators and government authorities took decisive action by guaranteeing full protection for all deposits, regardless of their size. This move was crucial in quelling panic and preventing the crisis from spreading to other banks. Public reassurances, including statements from the US President, played a key role in restoring confidence among depositors and investors alike.
A central argument for substantially raising the deposit insurance limit is grounded in the principle that individual depositors should not be burdened with the responsibility of analysing complex bank balance sheets before entrusting their funds. Holding a bank account today is a basic necessity for participation in modern economic life. Therefore, it is the duty of the state, through banking regulators, to ensure the safety of these deposits. This safety net should specifically apply to bank deposits alone and not extend to other financial products such as stocks, bonds, or mutual funds, where investors knowingly assume risks in pursuit of higher returns.
However, increasing the deposit insurance limit is not without challenges. A higher insurance ceiling may inadvertently encourage bank management to engage in riskier behaviour, comforted by the knowledge that deposits are guaranteed. This moral hazard must be addressed through stringent regulatory oversight and enhanced supervision to ensure that banks maintain prudent risk management practices. While systemic risks cannot be eliminated in a large and complex economy, policymakers must ensure that individual depositors are never left to bear the brunt of banking failures.
In conclusion, raising the deposit insurance limit is a critical policy measure in today’s fast-evolving financial landscape. It protects ordinary depositors, enhances confidence in the banking system, and mitigates the risks of destabilising bank runs exacerbated by technological innovations. At the same time, it demands a balanced approach, coupling increased protection with robust regulatory frameworks to safeguard the broader financial system and economy.
