Ever wondered what would happen to your deposits if banks decided to shut shop one day?

Let’s say you have money sitting at a major bank and you might have an SB account, a current account, FD, etc. with this bank. What happens if that bank closes?

Well, what happens is that there is something called DICGC cover, DICGC stands for Deposit Insurance and Credit Guarantee Corporation. Such corporations were established to secure the public’s trust in the banking system and to ensure that the Bank run does not happen.

A Bank run or a run on the bank is a phenomenon where depositors rush towards the bank to withdraw their money because they believe that the bank may become insolvent or cease to exist in the near future. As more and more depositors withdraw their money, it eventually leads to default which further triggers withdrawals that may lead to a bank facing bankruptcy.

Corporations such as DICGC helps in putting a depositor’s mind at ease because now they know that even if a bank goes bust, they still have the DICGC cover. The DICGC has an INR 50 crore line of credit fully issued from the Reserve Bank of India.

What is DICGC?

DICGC with its headquarters in Mumbai is owned and subscribed by the apex monetary body. It was established on 15 July 1978 under the DICGC Act, 1961, which guarantees credit facilities and provides insurance of deposits.

When the bank is unable to pay its deposit holders, DICGC provides deposit insurance that acts as a protective cover for depositors. It was created to ensure stability and generate people’s confidence in the banking system by providing deposit insurance and credit guarantee to small depositors and borrowers.

History of DICGC

The DICGC was established in July 1978, but it was the banking crisis of Bengal in the year 1948 which brought attention to the idea of insuring deposits kept with banks. The apex monetary body, RBI introduced certain measures to ensure the scrutiny of banks. In the year 1950, this concept got support from the Rural Banking enquiry committee. But it was in the year 1960 that this concept was given serious consideration by the RBI and the government of India after the collapse of major banks at the time, Laxmi Bank Ltd. and Palai Central Bank ltd.

On 21 August 1961, a bill was introduced in the parliament which was called the Deposit Insurance bill. Initially, only commercially functioning banks such as the State Bank of India and the branches of the banks headquartered outside of India came under the purview of the DIC corporation scheme.

The DICGC came into existence on 15 July 1978, when the RBI decided to merge the two organisations which were, deposit insurance (DIC) and credit guarantee (CGCI)

How does the DICGC corporation work?

Established on 15 July 1978 under the DICGC Act 1961, the corporation ensured the insurance of deposits and guarantee towards credit facilities.

The management capital of DICGC is INR 50 crore, fully issued and subscribed by the Reserve Bank of India. The Deputy Governor of RBI is the chairman of DICGC.

The maximum insurance amount covered under this scheme is INR 5 lakhs for each depositor which includes both, interest amount as well as the principal amount.

The Banks that are covered under the deposit insurance scheme are

  • All commercial banks
  • LABs (Local Area Banks )
  • RRBs (Regional Rural Banks)
  • Branches of foreign banks
  • Co-op banks such as
    • State Co-op Banks
    • Urban co-op banks
    • District co-op banks

The DICGC insures all bank deposits such as that in

  • SB account
  • Current account
  • Fixed deposits
  • Recurring deposits, etc.

Type of deposits that do not fall under the DICGC scheme

  • Central/State Governments deposits
  • SLD deposits with the State Co-op Banks, SLD stands for State Land Development Banks
  • Inter-bank deposits
  • Foreign governments deposits
  • Corporation exempted amount after RBI’s approval

Cancellation of registration

As per Section 15A of the DICGC Act, if the bank fails to pay three consecutive premiums then the registration of a bank insured under the DICGC scheme may be cancelled by the corporation. In such a scenario, the public is notified through newspapers when DICGC withdraws the coverage from a bank,

DICGC – Frequently Asked Questions

1. How do I know if my bank comes into the list of banks insured with DICGC?

After registration, printed leaflets are provided to the banks insured with DICGC. The purpose of leaflets is the display of information regarding the DICGC’s protections afforded to the bank depositors. In case of any queries, account holders/ depositors of the banks shall enquire with bank officials of that branch.

2. Maximum limit for an account holder who has money deposited in the different branches of the same bank?

In such cases where a customer holds accounts in different branches of the same bank, deposits are aggregated and a maximum amount of up to INR 5 lakhs is paid.

3. Does both principal amount and interest come under DICGC cover?

Yes, both principal and interest amounting up to INR 5 lakhs are covered under DICGC cover.

Refer to the example below:

If someone has an FD of INR 4,85,000. If he/she accrues interest of an amount of INR 20,000 after a year. In an ideal scenario, the bank has to pay a maturity amount of INR 5,05,000. But if the bank goes bust, the DICGC covers insurance up to five lakhs. Any amount over and above INR 5 Lakhs won’t be insured. The reason behind the same is that the maximum amount insured under the DICGC scheme is INR 5,00,000

4. What if a depositor has accounts in more than one bank, are they insured separately?

Yes. Customer’s deposits at different banks are insured separately.

For example, If a customer holds deposits with ABC bank and XYZ bank, the insurance coverage limit of ABC bank and XYZ bank would be up to five lakhs each.

5. What if the customer has multiple accounts with a bank?

In such scenarios where a person has multiple accounts in the same bank, for example, one joint account with a family member and the other one as an individual account, then DICGC pays the maximum compensation of INR 500,000 for each account.

Bottom line

In the end, it is the corporations such as DICGC that help in ensuring stability and maintaining depositor’s faith in the financial institutions in the event of a setback to the financial system. DICGC cover which ensures deposit insurance and credit guarantee, acts as a much-needed safeguard measure.