Deposit insurance: How you can ring fence your savings from bank collapse

Even as Silicon Valley Bank’s (SVB) collapse in the US is shocking depositors, a spate of recent cooperative banks failing in India has left domestic investors equally worried.

California-based SVB was closed last week by the California Department of Financial Protection and Innovation, which later appointed the Federal Deposit Insurance Corporation (FDIC) as its receiver. SVB, which was primarily focused on providing financing to startups, had grown to become the 16th largest US bank by assets, with $209 billion in assets and around $175.4 billion in deposits as of the end of 2022.

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The collapse of Silicon Valley Bank is not only the second-largest retail bank failure in US history, but it’s also the largest bank failure since Washington Mutual in 2008, causing market jitters.

RBI’s restrictions on 10 cooperative banks

Back home, the Reserve Bank of India (RBI) recently imposed several restrictions on 10 cooperative banks, including on withdrawals, in the wake of the deteriorating financial condition of the lenders. The restrictions will remain in place for six months, the Reserve Bank of India (RBI) said in separate statements.

With restrictions in place, the banks, without prior approval of RBI, cannot grant loans, make any investment, incur any liability, and transfer or otherwise dispose of any of their properties.

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Customers of HCBL Co-operative Bank, Lucknow (Uttar Pradesh), Adarsh Mahila Nagari Sahakari Bank Maryadit, Aurangabad (Maharashtra), Shimsha Sahakara Bank Niyamitha, Maddur, Mandya District in Karnataka, The Hiriyur Urban Co-operative Bank Ltd, Hiriyur, (Karnataka), and Imperial Urban Co-operative Bank Ltd, Jalandhar (Punjab) cannot withdraw funds from their accounts due to present liquidity position of the three lenders.

However, customers of Uravakonda Co-operative Town Bank, Uravakonda, (Anantapur District, Andhra Pradesh) and Shankarrao Mohite Patil Sahakari Bank, Akluj (Maharashtra) can withdraw up to ₹5,000. Customers of Defence Accounts Co-operative Bank Ltd., Pune, and National Mercantile Co-operative Bank Ltd, Lucknow, can withdraw up to ₹30,000 while the withdrawal limit is set at ₹10,000 for customers of Pune Sahakari Bank Ltd., Shivajinagar, Pune.

Despite concerns over their deposits in cooperative banks, RBI has checks and balances in place. However, the biggest source of comfort for the customers is Deposit Insurance and Credit Guarantee Corporation (DICGC) insurance.

₹5 lakh cap on deposits covered under DICGC

While imposing restrictions on co-operative banks, RBI said: “The eligible depositors would be entitled to receive deposit insurance claim amount of his/her deposits up to a monetary ceiling of ₹5,00,000/- (Rupees five lakh only) in the same capacity and in the same right, from the Deposit Insurance and Credit Guarantee Corporation, under the provisions of Section 18A of the DICGC Act (amendment) 2021, based on submission of willingness by the concerned depositors.”

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As per RBI, each depositor in a bank is insured up to a maximum of ₹5 lakh for both principal and interest amount held by him/her in the same right and same capacity as on the date of liquidation/cancellation of the bank’s licence or the date on which the scheme of amalgamation/merger/reconstruction comes into force.

If you have deposits with more than one bank, deposit insurance coverage limit is applied separately to the deposits in each bank, says RBI.

Which banks are insured by the DICGC?

Commercial banks: All commercial banks including branches of foreign banks functioning in India, local area banks and regional rural banks are insured by the DICGC.

Cooperative banks: All State, Central and Primary cooperative banks, also called urban cooperative banks, functioning in States / Union Territories which have amended the local Cooperative Societies Act empowering the RBI to order the Registrar of Cooperative Societies of the State / Union Territory to wind up a cooperative bank or to supersede its committee of management and requiring the Registrar not to take any action regarding winding up, amalgamation or reconstruction of a co-operative bank without prior sanction in writing from the RBI are covered under the Deposit Insurance Scheme. At present all co-operative banks are covered by the DICGC.

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Primary cooperative societies are not insured by the DICGC.

What does the DICGC insure?

The DICGC insures all deposits such as savings accounts, fixed deposits (FD), current accounts, recurring deposits (RD), etc. deposits except the following types of deposits

It insures deposits of foreign governments, deposits of Central/state governments, inter-bank deposits, deposits of the State Land Development Banks with the State co-operative bank; any amount due on account of and deposit received outside India, any amount that has been specifically exempted by the corporation with the previous approval of RBI.

How you can optimise DICGC cover beyond ₹5 lakh

If an individual opens more than one deposit account in one or more branches of a bank (say, Rita opens one or more savings/current account and one or more fixed/recurring deposit accounts etc), all these are considered as accounts held in the same capacity and in the same right. Therefore, the balances in all these accounts are aggregated and insurance cover is available up to ₹5 lakh in maximum.

If Rita also opens other deposit accounts in hre capacity as a partner of a firm or guardian of a minor or director of a company or trustee of a trust or a joint account, say with her spouse, in one or more branches of the bank, then such accounts are considered as held in different capacity and different right. Accordingly, such deposits accounts will also enjoy the insurance cover up to ₹5 lakh separately.

However, DICGC has clarified that the deposit held in the name of the proprietary concern where a depositor is the sole proprietor, and the amount of deposit held in her individual capacity, are aggregated and insurance cover is available up to ₹5 lakh in maximum.

	Savings A/C	Current A/C	FD A/C	Total Deposits	Deposits insured up to
Rita (Individual)	₹4,17,200	₹22,000	₹80,000	₹5,19,200	₹5,00,000
Rita (Partner of a company)		₹4,75,000	₹50,000	₹5,25,000	₹5,00,000
Rita (Guardian for a minor)	₹97,800		₹3,80,000	₹4,77,800	₹4,77,800
Rita (Director of a company)		₹4,30,000	₹2,45,000	₹6,75,000	₹5,00,000
Rita jointly with husband	₹87,500	₹4,50,000	₹70,000	₹6,07,500	₹5,00,000
Deposits held in joint accounts (revised w.e.f. April 26, 2007) Illustration source: RBI

If more than one deposit account (Savings, Current, Recurring or Fixed deposit) are jointly held by individuals in one or more branch of a bank, say three individuals A, B & C hold more than one joint deposit accounts in which their names appear in the same order, then all these accounts are considered as held in the same capacity and in the same right. Accordingly, balances held in all these accounts will be aggregated to determine the insured amount within the limit of Rs 5 lakh.

However, if individuals open more than one joint accounts in which their names are not in the same order for example, A, B and C; C, B and A; C, A and B; A, C and B; or group of persons are different say A, B and C and A, B and D etc. then, the deposits held in these joint accounts are considered as held in the different capacity and different right. Accordingly, insurance cover will be available separately up to ₹5 lakh to every such joint account where the names appearing in different order or names are different, stated DICGC.

Account (i) (Savings or Current A/C)	First a/c holder- “A” Second a/c holder – “B”	Maximum insured amount up to ₹5 lakh
Account (ii)	First a/c holder – “A” Second a/c holder – “C”	Maximum insured amount up to ₹5 lakh
Account (iii)	First a/c holder – “B” Second a/c holder – “A”	Maximum insured amount up to ₹5 lakh
Account (iv) at Branch ‘X’ of the bank	First a/c holder – “A” Second a/c holder – “B” Third a/c holder – “C”	Maximum insured amount up to ₹5 lakh
Account (v)	First a/c holder – “B” Second a/c holder – “C” Third a/c holder – “A”	Maximum insured amount up to ₹5 lakh
Account (vi)(Recurring or Fixed Deposit)	First a/c holder – “A” Second a/c holder – “B”	The account will be clubbed with the a/c at (i)
Account (vii) At Branch ‘Y’ of the bank	First a/c holder – “A” Second a/c holder – “B” Third a/c holder – “C”	The account will be clubbed with the a/c at (iv)
Account (viii)	First a/c holder – “A” Second a/c holder – “B” Third a/c holder – “D”	Maximum insured amount up to ₹5 lakh

Illustration source: RBI

To optimise the DICGC cover, one can spread their money across banks, with less than ₹5 lakh deposits each, or put money in the same bank, but with different account holder configurations as explained above. The former is not a very practical suggestion, as it would involve transactions with multiple banks. This, in turn, would mean more forms to fill, more KYC to submit, and additional burden at the time of filing income tax returns.

When is DICGC liable to pay?

If a bank goes into liquidation, “DICGC is liable to pay to the liquidator the claim amount of each depositor up to ₹5 lakh within two months from the date of receipt of claim list from the liquidator. The liquidator has to disburse the claim amount to each insured depositor corresponding to their claim amount.”

If a bank is reconstructed or amalgamated/merged with another bank: “The DICGC pays the bank concerned, the difference between the full amount of deposit or the limit of insurance cover in force at the time, whichever is less and the amount received by him under the reconstruction/amalgamation scheme within two months from the date of receipt of claim list from the transferee bank / Chief Executive Officer of the insured bank/transferee bank as the case may be.”