How to Maximise the Free Bank Deposit Insurance?

October 7, 2021 Mutual Fund

Over the last few years, more and more banks In India have collapsed due to ballooning NPAs and lack of corporate governance, and many would collapse in future as well. In situations like these, the increased insurance cover offered by DICGC (Deposit Insurance and Credit Guarantee Corporation) could bring a sense of security to the depositors to some extent. However, many depositors believe that the maximum insurance coverage is Rs 5 Lakhs per depositor and they can cover only upto Rs 5 Lakhs under Bank Deposit Insurance. This article will explain how depositors can maximise this government offered Free Bank Deposit Insurance Coverage to more than 10 times than its offerings.

What is DICGC?

Deposit Insurance and Credit Guarantee Corporation (DICGC) is a subsidiary of the Reserve Bank of India (RBI) that provides insurance on deposits held by customers in a bank. The coverage of Bank Deposit Insurance is extended to the deposits held in commercial public banks and small finance banks, such as State Bank of India (SBI), ICICI Bank, Suryodaya small finance bank, etc.

So, in simple words, DICGC protects depositor’s money which is kept in a bank, provided the bank has opted for DICGC cover. A depositor needs to keep this in mind that the Bank Deposit Insurance is not provided for deposits kept in Non-Banking Financial Companies.

How much cover is offered by DICGC?

Effective 4th February 2020, the Bank Deposit Insurance covered under DICGC was raised to Rs 5 Lakhs from the earlier cover of Rs 1 Lakh. So, now you are insured for up to Rs 5 Lakhs of bank deposit (principal +interest).

Which deposits are covered under the Bank Deposit Insurance?

• Saving account deposits

• Current account deposits

• Fixed deposits

• Recurring deposits

Which deposits are not covered under the Bank Deposit Insurance?

• Deposits of central or state government

• Deposits from foreign governments

• Deposits of the State Land Development Banks with the State Co-operative Bank

• Inter-bank deposits

• Funds due on account of India and deposits received outside India

• Any funds that are exempted by the corporation with the previous approval of the RBI

How does the Bank Deposit Insurance by DICGC work?

The Reserve Bank of India states, “Each depositor in a bank is insured up to a maximum of Rs 5,00,000 (Rupees Five Lakhs) for both principal and interest amount held by him in the same right and same capacity as on the date of liquidation/cancellation of bank’s licence or the date on which the scheme of amalgamation/merger/reconstruction comes into force.”

This means, all your accounts i.e. savings, current, fixed, recurring, etc. held in the same bank will be clubbed and you will get up to Rs 5 Lakhs of total insurance on the total principal and interest.

Suppose you had deposited Rs 5 Lakhs in a bank across saving and fixed deposit accounts and the interest you accumulated over the years is Rs 20,000. In this case, if the bank fails, you will get a maximum of Rs 5,00,000 with bank deposit insurance.

Now, let’s assume you had deposited Rs 2 Lakhs in a fixed deposit and earned an interest of Rs 14,000. In this case, if the bank fails, you will get the entire amount i.e. Rs 2,14,000, as it is lower than the maximum coverage provided by DICGC.

How can you maximise the Bank Deposit Insurance Cover?

As stated by the RBI, only the bank deposits held in the same right and in the same capacity are clubbed together for bank deposit insurance. Therefore, if you hold bank deposits in different rights and capacities, you will be able to get an extra insurance cover.

In simple words, if you hold all your bank deposits in your single name, you will get a maximum of Rs 5 Lakhs through bank deposit insurance on the total deposits. However, if you segregate your deposits in different rights and capacities by depositing in a joint saving account and fixed accounts with your spouse, children, siblings, etc., you will get a separate insurance cover for each of the deposits.

For example, Ms Nisha has total of Rs 50 Lakhs deposited in a bank. Say, she has Rs 5 Lakhs in a savings account and remaining Rs 45 Lakhs in the fixed deposits. As we know, if the bank fails, she will get only up to Rs 5 Lakhs with deposit insurance.

However, if Ms Nisha deposits in different rights and capacities in different combinations by segregating the funds, she can get the insurance cover for her entire deposit amount. Here’s how Ms Nisha can deposit her funds by opening other deposit accounts with her husband and other family members:

The above table is for illustration purpose only.

So, like this, you can deposit the amount with more such combinations with different rights and capacities to maximise the bank deposit insurance cover. Apart from this, individuals can also open deposit accounts as directors/partners in different firms. Moreover, keeping deposits in different banks will also maximise your deposit insurance coverage.

Will it work for all kinds of multiple accounts?

No, you will get separate deposit insurance only for the accounts that are held in different rights and capacities. So, if a proprietor has Rs 2,00,000 in the savings account and Rs 5,00,000 in the proprietary current account, the total amount will be clubbed, and he/she will get up to Rs 5 Lakhs deposit insurance if the bank fails. It is because a proprietorship firm does not have a separate legal existence from its owner.

To Conclude:

People generally keep funds in fixed deposits because they want to keep the principal amount safe. However, there is an increase in the number of banks failing in India. Therefore, the new increased cover of deposit insurance by DICGC has provided relief to lakhs of depositors. If you segregate your funds smartly, you could be able to cover most of your bank deposits with deposit insurance.

This article first appeared on PersonalFN here