The DIF’s full form is a Deposit Insurance Fund. In the USA, the deposit insurance fund helps safeguard your deposits insured by FDIC (Federal Deposit Insurance Corporation). In case a financial institution fails, DIF helps to protect your deposit fund.
A certain amount of capital is allocated to protect the financial interests of the depositors. Where is the funding for DIF derived from? The deposit insurance fund is primarily funded through insurance premiums collected from banks, where 6,000+ member banks contribute to the resources.
What is the deposit insurance fund?
In India, deposit insurance was first introduced in 1962. In fact, India is the second country globally where such a scheme was introduced. In the United States, the DIF scheme was introduced in 1933.
The deposit insurance fund was necessitated in India during the late 19th and early 20th centuries when the infamous banking crisis in Bengal occurred. Some of the major bank failures took place during 1913-14 and 1946-48.
The need for DIF was felt more urgently, especially after the failure of the Travancore National and Quilon Bank. Interim measures were undertaken before the Banking Companies Act of 1949 was enacted. This enabled the Reserve Bank of India (RBI) to supervise and inspect comprehensively.
In 1960, the final catalyst to introduce deposit insurance in India took place. The event that triggered it was the failure of two more banks—Laxmi Bank and Palai Central Bank. On August 21, 1961, the Deposit Insurance Corporation (DIC) Bill was introduced in the Parliament and the President approved DIC on December 7, 1961. The operations of the deposit insurance fund in India started on January 1, 1962, which initially covered functioning commercial banks.
At first, DIF mainly protected small depositors from losing their savings from bank failures. The main purpose of the DIC was to:
- Prevent panic
- Promote banking stability
- Facilitate deposit mobilisation for economic growth
In 1968, the Deposit Insurance Corporation Act was amended. Now, the facility has been extended to cooperative banks. Consequently, the state governments were then required to amend their cooperative laws. This expansion significantly increased DIC's scope of operation.
The Credit Guarantee Corporation of India Ltd. (CGCI) was established in 1971. It mainly addressed the credit needs of neglected sectors. DIC and CGCI were subsequently merged to create DICGC (Deposit Insurance and Credit Guarantee Corporation). Its focus shifted more towards guaranteeing credits.
In the 1990s, a liberalised economic regime was introduced in India, leading to financial sector reforms. On the one hand, credit guarantees gradually phased out. On the other, the focus of DICGC was reverted to deposit insurance to:
- Prevent panics
- Reduce systemic risk
- Ensure financial stability
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Key takeaways
- The Deposit Insurance and Credit Guarantee Corporation (DICGC) is the primary deposit insurance provider in India.
- A depositor has a claim to a maximum of Rs. 5 lakh per account as insurance cover.
- DICGC insures all bank deposits, including saving, fixed, current, recurring, etc., except specific types of deposits.
- The premium for the insurance is paid by banks to the DICGC and is not passed on to depositors.
- Deposit insurance helps protect depositors from losses in case of bank failures and ensures economic stability.
How do deposit insurance funds work?
The main purpose of a deposit insurance fund is to give bank account holders a sense of confidence in the banking system. The fund guarantees the safety of their deposits in banks.
But how does DIF work? Let’s find out.
DICGC provides up to Rs. 5 lakh guaranteed insurance coverage for each depositor of Indian and foreign commercial banks operating in India. The deposited amount can be any type. It can be a current account, fixed, or savings account deposit. The deposits that are excluded from this guaranteed insurance facility are:
- Deposits obtained from foreign sources
- Deposits that belong to foreign governments
- Deposits belonging to inter-bank deposits
If your deposited amount exceeds Rs. 5,00,000 (principal amount + interest), DICGC’s guaranteed insurance coverage will not cover it. If the depositor has any outstanding dues, it is also excluded from the deposit insurance fund’s guarantee.
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Recent reforms of the deposit insurance fund
The DICGC Act of 2021 increased deposit insurance coverage from Rs. 1 lakh to Rs. 5 lakh per depositor. This move aimed to provide greater protection to depositors in case of bank failures. Also, in the recent reform of the DICGC Act of 2021, the Indian government introduced a new assessment rate of 0.5% of the deposit liability of banks. It is believed that this will increase the DIF balance and enhance the stability of the deposit insurance system.
Also read: What is expense ratio?
Conclusion
Deposit insurance funds in India have come a long way since their inception in 1962. This evolution has fortified India’s financial landscape. Though it began as a response to banking crises over the years since the 1930s, the coverage of deposit insurance has expanded progressively over the years.
This evolutionary process underscores RBI’s commitment to bolster the confidence of depositors. It helped the Indian banking industry to become stable and, at the same time, facilitated the growth of the economy. After the 1990s, DICGC refocused on safeguarding the interests of depositors and reinforcing the resilience of India's banking industry with evolving challenges.
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