After several account holders suffered due to the PMC bank crisis, the government is seriously considering hiking the insurance cover on deposits with banks. The current limit is Rs 1 lakh. This means depending on the amount a person has in their bank account, they are entitled to a maximum of Rs 1 lakh as the sum insured, if the bank were to go bust. This limit was fixed in 1993. Interestingly, that time too, there was a bank going insolvent in Maharashtra, the Bank of Karad.
According to a Financial Express report, the proposal now being considered by the government is to lift this sum insured to Rs 2 lakh, while there are others who feel this could be even Rs 3 lakh. Those suggesting the higher level of Rs 3 lakh are relying on the practice being followed in many countries of fixing this amount as twice that of the per capita GDP. The last revealed figure for the country’s per capita GDP is Rs 1,42,719.
The government has to bring in an amendment to the Financial Resolution and Deposit Insurance (FRDI) law to enable this increase in the deposit cover amount.
The other critical change being contemplated is with regard to when the insurance company releases this cover amount if a bank is facing a crisis like the one in PMC bank. As per the existing laws, depositors will have to wait till the entire process of liquidation of the bank is completed. That could take very long.
Going strictly by the laws in vogue, the government need not fiddle with this deposit insurance cover. There is a 80:20 rule followed there. 80% of the depositors in terms of numbers hold only around 20% of the total deposits in a bank in terms of the value of the deposits held. 20% hold the remaining 80%. RBI says 91% of depositors in India accounting for nearly 28% of the deposits in all the banks are covered under the deposit insurance scheme.
What is however clear as of now is that the deposit insurance cover is definitely going to be enhanced. Whether it is Rs 2 lakh or Rs 3 lakh is perhaps the question.