Banks play a crucial role in our daily lives, providing us with a safe place to store our hard-earned money. In addition to being convenient, banks offer a range of services that help us manage our finances, from online banking to investment options. However, it's important to understand what happens to our money in the unlikely event that the bank fails. To comprehend this, we need to first understand how banks operate.

When individuals deposit their money in a bank account, the bank pays them a percentage of interest on that deposit. However, the bank doesn't simply hold onto the deposited money; instead, it uses those funds to lend money to others who need it. These borrowers then pay back the loan with interest at the end of the loan period. The difference between the interest paid to depositors and the interest received from borrowers is the bank's profit.

Despite the careful management of funds by banks, there is always a risk of failure due to various reasons, such as too many bad loans, low liquidity, or insolvency. In such cases, deposit insurance comes into play.

Deposit Insurance and Credit Guarantee Corporation (DICGC) is a wholly-owned subsidiary of the Reserve Bank of India that is responsible for protecting depositors' money in the event of a bank's failure. DICGC was established in 1978 to ensure that depositors do not lose their hard-earned money in case a bank is unable to pay them back. DICGC provides insurance coverage of up to ₹5 Lakhs for a user's deposit, including both the principal and interest amount.

Knowing about deposit insurance is essential for anyone who wants to keep their money safe in the bank. While banks are generally reliable, it's always better to be prepared for the worst-case scenario. By understanding how banks operate and the role of deposit insurance, you can protect your finances and ensure that your hard-earned money is safe and secure.

Why is this relevant for investors? 

Over the years, quite a few banks have failed all over the world, leading to a lot of depositors losing their money. Out of these, there is a list of failed banks that belongs to India as well. The biggest misconception that plagues many people is that some banks are “too big to fall”. That’s often not the case. The recent silicon valley bank fall has proven this wrong, among many other banks closer home. 

Seeing the deposits’ plight in the recent environment of banks failing in India, the insurance limit under DICGC was raised from ₹1 Lakh to ₹5 Lakhs in 2020. This means the users can rest assured of about ₹5 Lakhs of their deposit. 

While this may not seem like a very large amount, diversifying deposits over a few banks could provide ample cover for their parked money. However, one thing to note is that all funds deposited in the same bank, across types of accounts, are added together when being considered for insurance. So, the deposits have to be made in different banks to ensure you get the ₹5 Lakh cover for each one. 

What are the institutions covered under DICGC?

The institutions covered under DICGC include all Commercial and Cooperative banks. Commercial banks include all foreign banks functioning anywhere in India, local area banks, and regional rural banks. While cooperative banks include all State, Central, and Primary cooperative banks. 

Cooperative banks, on the other hand, are banks that operate under the supervision of the Reserve Bank of India (RBI) in states and union territories that have amended their cooperative society laws. This amendment says that if a cooperative bank fails, the RBI has the power to close it down or take over its management. All cooperative banks are protected by the Deposit Insurance Scheme administered by the Deposit Insurance and Credit Guarantee Corporation (DICGC).

The DICGC insures all deposits such as savings, fixed, current, recurring, etc. However, there are some exclusions to what institutions are covered under the DICGC. These include:

• Deposits from foreign governments
• Primary cooperative societies
• State Co-operative Banks receiving deposits from State Land Development Banks.
• Amounts owed to India and deposits received from foreign sources.
• Central or state government deposits
• Inter-bank deposits
• Funds that have received prior approval from RBI and are exempted by the corporation.

While making deposits or opening an FD in Non-Banking Financial institutions (NBFCs), be vary of the fact that these are not covered by the DICGC. Examples of NBFCs providing these services include Bajaj Finance Limited, Muthoot Finance, HDB Finance Services, and Aditya Birla Finance Ltd, among others. 

What’s the key takeaway for you?

The strength of the country’s economy is determined by the strength of its banking sector. It’s the glue that holds a country together and an inevitable part of all our lives. But with thousands of banks across the world and many right here in India, there are high chances that few will fail. So, to decrease your odds of losing your money, in case you happen to fall into these failed banks, you need to know your rights as a depositor. 

Acquiring more knowledge helps you understand how you can best protect your money, no matter how the external environment changes. So, do your own research and maximize the safety of your money.