India Considers Raising Bank Deposit Insurance Limit Amid Recent Bank Crisis
The Indian government is actively considering raising the insurance coverage for bank deposits, currently set at ₹5 lakh per depositor. This move aims to bolster depositor confidence, especially in light of recent financial challenges faced by cooperative banks.
Current Deposit Insurance Framework
The Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the Reserve Bank of India (RBI), currently provides insurance coverage up to ₹5 lakh for each depositor across all commercial and cooperative banks. This limit was last revised in February 2020, increased from the previous ₹1 lakh, following financial irregularities in certain banks. The DICGC insures various types of deposits, including savings, fixed, current, and recurring deposits.
Government’s Proposal for Increased Coverage
In response to recent banking crises, particularly involving cooperative banks, the government is evaluating a proposal to further increase the deposit insurance limit. While the exact figure under consideration has not been officially disclosed, reports suggest that the coverage could be raised to between ₹8 lakh and ₹12 lakh per depositor. This potential increase aims to provide greater security to depositors and enhance trust in the banking system.
Financial Implications for Banks
Raising the deposit insurance limit is expected to have financial implications for banks. According to estimates, such an increase could reduce banks’ net profits by up to ₹12,000 crore annually. This reduction corresponds to a moderation in Return on Assets (RoA) by up to four basis points and Return on Equity (RoE) by up to 40 basis points. Additionally, if the insurance premium paid by banks to the DICGC is increased from the current rate of ₹0.12 to ₹0.15 per ₹100 of deposits, the combined impact on RoA and RoE could be up to seven basis points and 68 basis points, respectively.
Recent Cooperative Bank Crisis
The consideration to increase deposit insurance coverage has gained momentum following the recent financial instability of the New India Co-operative Bank. On February 13, 2025, the RBI imposed restrictions on the bank, suspending deposit withdrawals and loan disbursements for six months due to supervisory concerns and liquidity issues. The central bank also appointed an administrator to oversee the bank’s operations during this period. This incident has raised concerns among depositors and highlighted the need for enhanced deposit protection measures.
Impact on Depositors
An increase in deposit insurance coverage would significantly benefit depositors, especially those with higher account balances. As of March 31, 2024, approximately 98% of deposit accounts were fully insured under the current ₹5 lakh limit. However, in terms of the total value, only 43.1% of assessable deposits were insured. Enhancing the insurance limit would extend coverage to a larger portion of deposit values, thereby offering greater protection to depositors.
Conclusion
The government’s consideration to raise the bank deposit insurance limit reflects a proactive approach to strengthening the financial safety net for depositors. While this move aims to enhance public confidence in the banking system, it also necessitates a careful assessment of the financial impact on banks. As discussions progress, stakeholders await official announcements detailing the new insurance coverage limits and implementation timelines.
