The current Rs 5 lakh deposit insurance limit in India has sparked a debate on whether it is adequate, especially in light of recent global banking crises and domestic concerns. While India hasn’t witnessed major bank failures akin to those in the US, a few significant cases—such as Yes Bank, Lakshmi Vilas Bank (LVB), and Punjab and Maharashtra Cooperative (PMC) Bank—have raised concerns.
These institutions were rescued by takeovers or bailouts, but the failures of several smaller cooperative banks remain a persistent issue. One consequence of banking failures abroad, especially in the US, has been a shift of depositor funds from smaller banks to larger, more stable ones, driven by a trust deficit. A similar trend could emerge in India, putting smaller banks under pressure.
In this context, there have been calls for a higher safety net for depositors, with many questioning if the Rs 5 lakh insurance cover—raised from Rs 1 lakh in 2021—is sufficient. This is particularly concerning for senior citizens, who rely on bank deposits as a primary investment option. While high-value depositors face the risk of losing substantial amounts in the event of a bank collapse, the Rs 5 lakh insurance cover offers little reassurance. Moreover, there is no guarantee that depositors will receive their full amount in a timely manner.
However, the Indian government asserts that the 2021 amendment to the Deposit Insurance and Credit Guarantee Corporation (DICGC) Bill has expanded coverage significantly. Currently, 98.3 percent of depositors are insured, and 50.9 percent of total deposit value is covered. These figures compare favorably to global averages of 80 percent of depositors and 20-30 percent of deposit value.
India’s deposit insurance system, introduced in 1961, was initially designed to provide depositors with at least some assurance in the event of a bank failure. The insurance cover was increased to Rs 1 lakh per depositor in 1993, and later raised to Rs 5 lakh in 2021. Despite these improvements, many believe that the coverage limit should be further increased to reflect the growing reliance on bank deposits, especially in times of economic uncertainty.
There is broad consensus that the deposit insurance cover needs to be higher, though opinions differ on the ideal threshold. One major concern is the time it takes for depositors to recover their money in the event of a bank collapse. While the 2021 amendment now allows depositors to receive their insured amount within 90 days if a bank is placed under moratorium, this assurance primarily benefits smaller depositors. High-value depositors, who keep large sums in banks, remain vulnerable.
To address the growing trust deficit in the banking system, experts argue that deposit insurance should cover the full amount deposited by all categories of depositors, rather than just smaller sums. Without an adequate guarantee, depositors may be inclined to shift their money to larger banks or alternative financial instruments, potentially destabilizing smaller institutions. While government banks are generally perceived as safer, the broader issue is ensuring that all depositors feel secure about the safety of their funds. Without this assurance, the banking system could see an outflow of deposits into other investment avenues, which would undermine confidence in smaller banks.
In conclusion, while the Rs 5 lakh deposit insurance limit has brought some stability, there is a case for further increasing the coverage to protect depositors, maintain trust, and prevent the outflow of funds to larger banks or alternative instruments. A higher insurance threshold could strengthen the entire banking system by ensuring that all depositors, regardless of the size of their deposits, feel secure.