Safety of a bank deposit

The failure of a bank can lead to unimaginable crisis in the lives of individuals who have deposited their hard earned money. Fortunately, investors are protected to some extent against losses due to bank failures, by a deposit insurance scheme.

A large part of the population in India relies on bank deposits as a vehicle for saving their hard earned money. Thousands of bank accounts are being opened every month, across the country. These bank deposits may not always be safe if a bank gets liquidated. The protection if any for retail investors from losses due to bank failures is not clear.

It may comfort investor to know that there is protection for depositors in the form of a Deposit Insurance Scheme (DIS) by the Deposit Insurance and Credit Guarantee Corporation (DICGC). This Corporation provides insurance coverage to all commercial banks operating in India. Here’s a look at how the Deposit Insurance Scheme operates and its various requirements.
The DICGC administers the DIS. Bank deposits such as savings, recurring, fixed and current, are covered under this scheme. However, the DIS doesn’t cover the deposits made by Central and State Governments. Also, deposits of foreign governments and any deposit received from outside India is outside the ambit of the DIS.

The premium for the insurance scheme is borne by banks. And, if the Corporation withdraws the insurance coverage of a bank, in case it fails to pay the insurance premium amount for three consecutive terms, it notifies the public through newspapers. So a depositor must keep a watch for such notices.

The insurance scheme is binding on all banks operating in India and no bank can voluntarily withdraw from it. The Corporation provides coverage to all commercial, local area and regional rural banks. All co-operative banks operating in India other than those from the States of Arunachal Pradesh, Nagaland, Meghalaya, Mizoram, and the Union Territories of Lakshadweep, Chandigarh, and Dadra and Nagar Haveli are covered under the scheme. However, primary cooperative societies are not covered under the DIS.

Under the DIS, the Corporation insures principal and accumulated interest up to a maximum amount of Rs 1 lakh. For example, if an investor has an account with a principal amount of Rs 75,000, plus an accumulated interest of Rs 4,000 on it, then the total amount insured will be Rs 79,000. If, however, the principal amount is Rs 95,000 and the accumulated interest is Rs 12,000, then the total insured amount will be Rs 1 lakh instead of the actual total of Rs 1.07 lakh.

The extent of insurance coverage also depends upon the type of account ownership patterns held by an individual. If investor has multiple deposits with different types of ownership patterns like single, joint, etc., in the same bank, the insurance coverage is applied separately to the deposits.

A joint account and a single account are considered separately. However, if more than one deposit account (savings, current, etc) are jointly held by individuals in one or more branch of a bank, all these accounts will be aggregated for the purpose of insurance coverage.

Further, if individuals open more than one joint account in which their names are not in the same order or the group of persons are different, then the deposits held in these joint accounts are considered separately. Accordingly, every such account will be covered separately up to Rs 1 lakh, for every such joint account where the names appear in a different order or names are different.

If investor have deposits in more than one bank, the insurance coverage will apply separately to the deposits in each of these banks. Accordingly, if investor has deposits in two different banks, the two funds are not aggregated, but are eligible for separate insurance coverage. In other words, these two deposits will be insured separately to the tune of Rs 1 lakh each.
In case of liquidation of investor’s bank, the DICGC repays every depositor the amount of their deposits up to Rs 1 lakh. The payments are made through the liquidator within 2 months of the receipt of claim by the concerned bank. However, in case of a merger and amalgamation of banks, the amount due to depositors is made to the transferee bank.

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