After the recent fiasco of the Lakshmi Vilas bank, the focus has again been shifted again to the safety of bank deposits. In this blog post, we will talk about the bank deposit insurance, the limits up to which you can get insurance for your deposits.
Banks are the most vital institutions in any economy and one cannot imagine managing finances without the aid of banks. Thinking about banks, the first thing that comes to our mind is trust and safety of our money held with them. Have you ever thought about what happens to your money when a bank fails? Does your money go off into thin air just like that? Read on.
For starters, the Reserve Bank of India (RBI) is the sole guardian of the banks. So it is the responsibility of the RBI to ensure the financial health of the banks. The RBI has to protect the interests of the depositors in any adverse situations that the banks may face. The safety of the funds deposited with the banks would be the topmost priority of the RBI. For ensuring this, RBI has set up a wholly-owned subsidiary the Deposit Insurance and Credit Guarantee Corporation (DICGC) which ensures insurance for your bank deposits. Just like any other insurance, even bank deposits are covered by an insurance policy. The DICGS has been set up just to achieve this.
When a bank fails, usually RBI takes over its management. RBI tries various steps including merger of the failed bank with another bank to set right the bank. The recent merger of Laxmi Vilas Bank with the DBS bank is an example of this. If such a merger is not possible, RBI usually cancels the license of the bankrupt bank. During such a period, a liquidator will be appointed. The liquidator will liquidate the assets of the bank to pay off the depositors.However, if there is a shortfall, the DICGC will pay the remaining amount. But this comes with a catch. The DICGC ensures guarantee for deposits up to Rs. 5 lakhs only. This means if you have a bank deposit of Rs. 5 lakhs and below, you will get the entire amount back in case of default by your bank. However if you have deposits above Rs. 5 lakhs with your bank which defaults, you will still get up to Rs. 5 lakhs as guaranteed sum.
Further, the insurance cover for your deposits also covers the interest portion that is accrued over your deposits. Also the Rs. 5 lakhs limit applies to total money that a customer has deposited with the bank across all accounts. For example if you have a savings bank account, a Fixed deposit account and a Current account with the same bank, then the deposits of all such accounts will be added to calculate your deposit insurance. Please note that each of the three accounts in the above example will not have a separate insurance cover of Rs. 5 lakhs. All three accounts combined will have an insurance cover.
However, things are a little difficult in case of joint accounts. Suppose you maintain a joint account as well as a saving account on your name with the same bank which defaults, then each of the joint accounts is treated as a separate account. However if you have two joint accounts with the same bank, then the first holder of the joint account names will be checked to determine if they are to be treated as a single account (in case first holder name is same) or different accounts (in case first holder names in two accounts are different). Also if you maintain an account for your minor child as a guardian, then this account will also be treated as a separate account for calculating the cap of Rs. 5 lakhs deposit insurance.
Having deposit insurance boosts the confidence of the depositors. The hike of deposit insurance to Rs. 5 lakhs was a big leap in this direction.