Trust at stake, Govt to hike deposit insurance cover

Trust at stake, Govt to hike deposit insurance cover

Photo for representation.

In a move that could better protect the interest of depositors, the government is planning to increase the deposit insurance cover to more than Rs 2 lakh for individual bank accounts, if a lender (banks or other financial institutions) collapses or its licence is cancelled by the Reserve Bank of India.

The upward revision in the insurance cover could come through the re-introduction of a revamped Financial Resolution and Deposit Insurance (FRDI) Bill in Parliament in the winter session beginning next week.

The last revision was effected in 1993 when the cover was increased from Rs 30,000 to Rs 1 lakh.

“It is a long-pending demand by the depositors. The move will encourage individuals to keep a better part of their deposits in banks and help them retain their faith in them,” an official privy to the decision told DH.

The revision comes close on the heels of a near-collapse of the Punjab and Maharashtra Cooperative Bank, which has shaken the faith of depositors.

Incidentally, the last time when the deposit insurance cover was revised 26 years ago, the trigger came from a Maharashtra-based private lender. The Karad Bank’s liquidation following a security scam led to a hike in the cover by over three times. The decision was taken to pacify depositors so that a run on banks could be avoided.

Thereafter, an RBI panel in 2011 had recommended a five-time hike in the insurance cover to Rs 5 lakh per depositor so as to encourage a majority of individuals to keep all their deposits in banks. But it was not implemented.

The government had introduced the FRDI Bill in the Lok Sabha in 2017 but it was withdrawn a year later after an uproar in and outside Parliament over a controversial 'bail-in' clause, which suggested that depositors money could be used by a failing bank or a financial institution to stay afloat.