How deposit insurance works in India?

When rumours about the financial health of a private bank began to circulate last week, people queued up at the bank's ATMs in the wee hours to withdraw money. One of my friends who had large sums parked in fixed deposits with the bank called to enquire about the rumour.

When I asked him whether he had similar deposits across a range of banks, he replied that his entire surplus cash of Rs 8 lakh was parked with the same bank, as he did not have an account with any other bank! Shocked, I took the opportunity to explain to him how deposit insurance works in India. Here is what my friend, and others like him, need to know.

How much is covered?
All deposits of up to to Rs 1 lakh in a commercial or cooperative bank in India are insured by the Deposit Insurance and Credit Guarantee Corporation of India (DICGC) (a wholly owned subsidiary of RBI).The insurance coverage to the banks is extended by collecting premium from the banks, at half-yearly intervals at the rate of 10 paise per annum per hundred rupees. The insurance protection is made available to the depositors free of cost. The cover of Rs 1 lakh is applicable for your principal and interest dues taken together. Deposits in different banks are separately insured, with each deposit eligible for Rs 1 lakh cover.

What kinds of deposits are covered?
Insurance cover is available across savings accounts, current accounts, recurring and fixed deposits.

Which banks are covered?
All commercial banks including branches of foreign banks functioning in India, local area banks and regional rural banks are covered. At present, all co-operative banks other than those from the States of Meghalaya and the Union Territories of Chandigarh, Lakshadweep and Nagar Haveli are covered under the deposit insurance system. Primary cooperative societies are not currently covered by the scheme.

What are the ways to increase the cover for my bank deposits?
Spreading your surplus across many banks is the most direct way to increase the deposit cover.
You can even make sure that your deposits in a single bank are insured, by having multiple joint accounts with different "first holders". Insurance tends to be offered in the first holder's name.

What happens to deposits in a joint account?
If more than one deposit account (whether savings, current, recurring or fixed deposit) is jointly held by individuals in one or more branches of a bank, then all the accounts in which their names appear in the same order will be aggregated for the Rs 1 lakh cover. However, if deposits are held under different first holders, then every such account will be eligible for insurance cover of Rs 1 lakh.

Is it possible to increase the insurance cover for my deposit by paying a higher premium?
No. It is not possible to pay premium and increase the cover. However, such provisions may come into being in future. Recently, with the financial turmoil in the US, as part of the bailout package, the US Government has increased the cover from $1,00,000 to $2,50,000. So it's possible in India that the cover may be enhanced in future.

How are the settlement claims awarded?
In the event of the winding up or liquidation of bank, every depositor of the bank is entitled to payment of an amount equal to the deposits held by him at all the branches of that bank put together, standing as on the date of cancellation of registration of the bank. So, all my friend has to do to avoid sleepless nights at the ATM is to spread his deposits over several banks, to increase his overall insurance cover!

Source HBL