Is India's bank deposit insurance adequate? A reality check
Summary
- India’s deposit insurance scheme offers wide coverage by number, but not by value—leaving large depositors at risk. With household savings rising, is the RBI’s safety net still fit for purpose?
Bank deposit insurance is a foundational safety net designed to protect depositors—the primary providers of capital to banks. It plays a crucial role in maintaining public trust and ensuring financial stability, particularly during banking crises.
While the concept of deposit insurance is reassuring in theory, the practical implementation in India often falls short, leaving key gaps in depositor protection. This article examines the evolution of India’s deposit insurance framework, its limitations, and whether recent policy measures are genuinely proactive—or simply reactive responses to emerging risks.
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India was the second country in the world, after the US, to introduce deposit insurance, doing so in 1962. The Deposit Insurance and Credit Guarantee Corp. (DICGC), a subsidiary of the Reserve Bank of India (RBI), oversees this system. Today, the insurance covers up to ₹5 lakh per depositor per bank. According to the RBI’s Handbook of Statistics on the Indian Economy, 98% of deposit accounts—by number—were covered under this scheme in 2023-24. However, in value terms, only 43% of total deposits were insured.
This discrepancy reveals two significant insights. First, a small group of depositors—roughly 2%—hold around 57% of total deposits, far exceeding the ₹5 lakh insurance cap. This leaves high-value depositors particularly vulnerable, despite their outsized contribution to the banking system.
Second, coverage in value terms has been on the decline, falling from 50% in 2020-21, when the insurance limit was last raised from ₹1 lakh to ₹5 lakh.
In effect, a critical section of depositors—those who contribute the most—remain inadequately protected. This raises an important question: Does the current philosophy of deposit insurance still serve its intended purpose? While it aims to shield depositors from financial shocks, the system falls short precisely where the stakes are highest. In times of uncertainty, large depositors may exit en masse, potentially triggering a destabilizing bank run.
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Deposit limits and investor confidence
A recent report by the State Bank of India (SBI) shows that India’s deposit insurance coverage ranks among the lowest globally. Even within the BRICS bloc, India trails: coverage is roughly ₹42 lakh in Brazil and ₹12 lakh in Russia.
The issue is not only the adequacy of the insurance limit but also its ability to instill confidence across the depositor spectrum. Historically, increases in India’s deposit insurance limits have been reactive—often following financial crises. The most recent hike in February 2020 came in the wake of the Punjab and Maharashtra Co-operative Bank (PMC Bank) crisis. Similarly, the 1993 revision from ₹30,000 to ₹1 lakh followed the collapse of Bank of Karad.
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The urgency of rethinking deposit insurance is underscored by a shift in household savings behavior. Between 2021 and 2024, deposits grew from 28% to 41% of total household financial assets—despite the rise of alternative investment avenues like equities and mutual funds. This trend reinforces the centrality of bank deposits in India’s financial ecosystem and highlights why strengthening deposit protection is critical.
So far, changes to insurance limits have aimed to calm public anxiety and restore confidence. But the RBI's reported deliberations over another potential increase raise a new set of questions. Is this an effort to attract deposits in a competitive financial landscape? A response to the collapse of the New India Co-operative Bank? Or a genuinely forward-looking move to account for rising savings and systemic risk?
While raising the insurance cap can boost depositor confidence, it also brings the risk of moral hazard—where both banks and depositors may take on greater risks under the assumption of a safety net. Depositors might pay less attention to a bank’s financial health, and banks might be tempted to pursue riskier lending or investment strategies.
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Ultimately, deposit insurance should be more than just a backstop against failure. It should be a robust, well-calibrated mechanism that reinforces trust across the banking system. Policymakers must now decide whether to merely patch existing flaws—or to rethink the very philosophy underpinning India’s deposit insurance regime.
Soumik Bhusan is associate professor at TAPMI Bengaluru. Pratibha Kumari is Assistant Professor at TAPMI Bengaluru.
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