Deposit insurance

Indian Economy glossary

Also called: Deposit insurance cover · Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT

Meaning

Deposit insurance is a guarantee that a bank depositor will get their money back, up to a fixed limit per depositor per bank, if the bank fails or the RBI places restrictions on it. In India, the DICGC gives this cover. The limit is Rs 5 lakh, and it includes both principal and interest [1].

It matters because it stops panic. If small savers know their money is safe, they do not rush to withdraw it, so one weak bank is less likely to set off a bank run (many depositors taking out money at the same time, which can break even a healthy bank).

Explanation

Why banks need a safety net

  • Asset-liability mismatch: a bank's liabilities (mainly deposits) can be withdrawn at short notice. Its assets (mainly loans) come back slowly, over years.
  • How a run happens:
  • A rumour spreads about the bank.
  • Many depositors withdraw together.

  • The bank cannot recall its loans fast enough, so it fails.

  • Deposit insurance breaks this chain. An insured small depositor has no reason to rush.

  • It is one part of the wider safety net, along with liquidity rules (LCR, NSFR), extra capital for big banks (D-SIBs) and early action on weak banks (PCA).

How the cover works

  • Limit: Rs 5 lakh per depositor per bank, "in the same right and capacity", from 4 February 2020. The limit was Rs 1 lakh from 1993.
  • Principal and interest together are covered up to Rs 5 lakh [1].
  • "Same right and capacity" means all accounts a person holds in the same role are added together. An account held in a different role (as an individual, partner or trustee, or a joint account with a different order of names) gets a separate Rs 5 lakh cover [1].
  • Worked example:
  • Ravi has Rs 4 lakh in savings and Rs 3 lakh in an FD, both in his own name, in Bank X.
  • Total = Rs 7 lakh, but he gets back only Rs 5 lakh. Rs 2 lakh is uninsured.
  • A joint account "Ravi & Meena" in the same bank is covered separately, up to another Rs 5 lakh.

  • Tip: splitting money across different banks also raises total cover, because the limit is per bank.

  • Interim payment: under the DICGC (Amendment) Act 2021, depositors are paid within 90 days of the RBI putting restrictions on a bank. They no longer have to wait until the bank is liquidated (closed and its assets sold).

Who pays: the premium

  • Premium is the fee paid for insurance. The insured bank pays all of it. It cannot pass the cost on to depositors [1].
  • Flat premium (since 1962): every bank paid the same rate, currently 12 paise per Rs 100 of assessable deposits (deposits that can be insured) [2].
  • Risk-Based Premium (RBP), effective 1 April 2026: safer banks pay less and riskier banks pay more [2].
  • Tier 1 model: scheduled commercial banks, excluding RRBs. Tier 2 model: RRBs and cooperative banks [2].
  • Banks with better ratings get up to a 33.33% cut from the risk model. Banks that have paid premiums for longer also get a vintage incentive of up to 25% [2].

  • LABs and Payments Banks stay at the standard rate. UCBs under regulatory action stay at the card rate [2].

  • Worked example:

  • Assessable deposits = Rs 10,000 crore.
  • Flat rate: 0.12% × 10,000 = Rs 12 crore.
  • With the full 33.33% risk-model cut: about Rs 8 crore.

Moral hazard: the side effect

  • Moral hazard means taking more risk when you are protected from the results.
  • Insured depositors stop checking whether their bank is safe.

  • The bank faces less pressure from depositors, so it may take bigger risks.

  • Partial fixes:

  • The cap (Rs 5 lakh) keeps large depositors watchful.
  • Risk-based premiums make risky banks pay more [2].

In India

  • Provider: DICGC (Deposit Insurance and Credit Guarantee Corporation). It was set up under an Act of 1961 and has worked in its merged form since 1978. It is a wholly owned subsidiary of the RBI.
  • Current cover: Rs 5 lakh (principal + interest) per depositor per bank, from 4 February 2020 [1].
  • Banks covered: commercial banks (including foreign bank branches), RRBs, Local Area Banks (LABs) and cooperative banks [1].
  • Not covered: NBFCs, PACS (primary agricultural credit societies), deposits of foreign governments, deposits of the Centre and states, inter-bank deposits, and deposits received outside India [1].
  • PMC Bank (2019): depositors could not get their money for years. This led to the DICGC (Amendment) Act 2021 and its 90-day interim payment.
  • Premium reform: the RBI Central Board approved the RBP framework on 19 December 2025. It was announced on 6 February 2026 and took effect on 1 April 2026 [2].

Don't confuse with

  • Bail-in: here the bank's own creditors (and sometimes depositors) take the losses when their claims are cut or turned into shares. Deposit insurance does the opposite and protects small depositors. The bail-in clause in the FRDI Bill 2017 scared depositors, and the Bill was withdrawn in 2018.
  • Bail-out: outside money, usually taxpayers' money or a state-led rescue, saves the whole bank (e.g. the Yes Bank scheme of March 2020, led by SBI). Deposit insurance does not save the bank. It only pays insured depositors, from a fund built from banks' premiums.
  • Per account vs per depositor: the Rs 5 lakh limit is per depositor per bank, in the same right and capacity, not per account. Five accounts in your own name in one bank share one Rs 5 lakh limit.
  • Prompt Corrective Action (PCA): PCA is the RBI's early warning step that restricts a weak bank before it fails. Deposit insurance pays depositors after a bank fails or is restricted.

Prelims Hooks

  • DICGC is a wholly owned subsidiary of the RBI. It was set up under a 1961 Act and has existed in merged form since 1978.
  • Cover is Rs 5 lakh per depositor per bank, including principal and interest, from 4 February 2020. It was Rs 1 lakh from 1993 [1].
  • The bank pays the premium, not the depositor [1]. Trap: an option saying depositors pay a small fee is wrong.
  • Covered: RRBs, LABs, cooperative banks and foreign bank branches. Not covered: NBFCs and PACS [1].
  • DICGC (Amendment) Act 2021: interim payment within 90 days of RBI restrictions. It was passed after the PMC Bank crisis of 2019.
  • The risk-based premium, in force from 1 April 2026, replaced the flat 12 paise per Rs 100 rate that had been used since 1962 [2].

Mains Points

  • Stability vs market discipline: the Rs 5 lakh cover and the 90-day payment protect small savers and stop panic (the PMC lesson). But a flat premium meant safe banks were paying for risky ones. The 2026 risk-based premium [2] brings back discipline because risky banks now pay more.
  • Coverage gaps: NBFC and PACS depositors have no cover [1], even though many rural and semi-urban savers use them. Average deposit sizes keep rising, so a fixed Rs 5 lakh limit covers a smaller share of deposits over time. Both gaps are points to discuss in a financial-inclusion answer.
  • Protecting depositors vs moral hazard (GS-III): insurance weakens depositors' checks on their banks. So it has to work alongside other parts of the safety net: PCA to act early, D-SIB capital add-ons, and credible bail-in tools for large creditors. After the FRDI Bill was withdrawn, India still lacks a full resolution law for failing financial firms.

Related concepts

Read more

Sources

  1. 1RBI FAQs — Deposit Insurance and Credit Guarantee Corporation (DICGC)rbi.org.in · tier 1
  2. 2RBI Press Release — DICGC Risk-Based Premium framework for deposit insurance (6 February 2026)rbi.org.in · tier 1