Explained: Your Bank Deposits Are Insured Up To Rs 5 Lakh

The Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the Reserve Bank of India (RBI), insures your bank deposits up to ₹5 lakhs which turns beneficial in case your bank is liquidated.

With Lakshmi Vilas Bank being the latest bank to be put under a moratorium by the RBI, bank depositors are once again expressing concerns about the safety of their hard earned money parked as deposits. These concerns have been a recurring event over the last one year, with Punjab and Maharashtra Co-operative Bank (PMC Bank) and private sector lender Yes Bank too facing adverse action from the central bank.

Banking experts are recommending that depositors should spread their deposits across bank accounts and banks. "The clever way of doing it is to split your money. You, your children and your wife keep five lakh per person because this five lakh covers per person. So, you distribute among banks, and within a bank also you distribute among your family members", said banking analyst and author Tamal Bandopadhyay in an interview to BOOM's Govindraj Ethiraj.

Also Read: Lakshmi Vilas Bank's Fall Man-Made, Not Systemic: Tamal Bandyopadhyay

But how does it work? Do you have to pay anything towards it?

Here's what you need to know about deposit insurance in India.

1. Is my bank covered?

Your bank is covered. The DICGC covers all commercial banks including branches of foreign branches operating in India. All co-operative banks are covered too, and so are local area banks and rural banks.

Co-operative societies, however, are not covered.

In 2019, BOOM debunked a rumour on WhatsApp that sprung up when HDFC Bank stamped a DICGC notification stating that only ₹1 lakh would be covered in case of the bank's liquidation on its passbooks. These messages suggested shutting accounts with the bank and shifting it elsewhere. However, in 2019, all banks were covered by the DICGC only up to ₹1 lakh.

In the Union Budget this year, Finance Minister Nirmala Sitharaman announced that deposit insurance cover would be raised from ₹1 lakh to ₹5 lakhs.

2. Are all my accounts with one bank insured separately?

For insurance purposes, all accounts that you may hold under the same right and capacity with the same bank would be clubbed and ₹5 lakh would be paid for them jointly. Therefore, if you, as an individual, hold a savings, current and fixed/recurring deposit with the same bank under your individual capacity, regardless of branch, these will be clubbed together and a ₹5 lakh payout would be given to you in totality even if the deposits in these three accounts jointly exceed ₹ 5 lakh.

Here's the illustration given by the DICGC.

If accounts are held jointly, the order in which the names appear matters too. Therefore, an account held with primary holder 'A' and secondary holder 'B' is not the same as an account with the same bank with primary holder 'B' and secondary holder 'A'. Both these accounts would be treated as separate and thus insured with up to ₹5 lakhs each.

But a savings account and, say, a fixed deposit with primary holder 'A' and secondary holder 'B' would again be clubbed together if held with the same bank and a payout of up to ₹5 lakhs is disbursed cumulatively.

As suggested by Bandopadhyay above, one can hedge their deposits by distributing it across banks and accounts. An individual depositing their savings in their individual capacity in bank 'X' would be treated separately from that in bank 'Y', even if both of them fail on the same day.

3. Am I charged for depositor insurance?

Your banks pays the premium to the DICGC to insure your deposits. According to the DIGCG, participation by banks in deposit insurance is compulsory.

Also Read: RBI Bats For Large Corporate Houses To Own Banks: All You Need To Know

4. How are insurance payouts made?

If a bank is liquidated, the claim up to ₹5 lakh is paid by the DICGC to the liquidator, which is in turn disbursed to the depositor within two months of the claim being made.

In a case a bank is being reconstructed or amalgamated, the DICGC will pay the difference between the full amount of deposit or the limit of insurance cover in force at the time, whichever is less and amount received by him under the reconstruction / amalgamation scheme. Again, this would need to be paid two months from the claims being obtained from the transferee bank/insured bank.

In case of PMC Bank, the moratorium is still ongoing and the bank is neither liquidated nor amalgamated and thus making their depositors ineligible for the scheme as of now. Yes Bank, however, was quickly rescued through a capital infusion by a State Bank of India-led consortium. The RBI has drawn up a draft plan to amalgamate Lakshmi Vilas Bank with DBS Bank India, and the authorities expect the process to be completed soon.

Also Read: Since 1999, RBI Has Put At Least 12 Banks Under Moratorium

You can find the information with the DICGC here.