Deposit Insurance in India under the DICGC Act, 1961

A bank run is a collective action problem. Each depositor withdraws because he fears the others will, and the withdrawal makes the fear true. Deposit insurance breaks that circle by guaranteeing the small depositor his money whatever happens to the bank, so that he has no reason to run in the first place. India adopted it in 1962, earlier than most countries, and the scheme is now contained in the Deposit Insurance and Credit Guarantee Corporation Act, 1961.

Figure 1: The development of deposit insurance in India

1. Origin and the Corporation

• The occasion: the failure of the Palai Central Bank in 1960 and of other banks in the preceding years made the case for a statutory guarantee of small deposits.
• The statute: the Deposit Insurance Corporation Act, 1961 came into force and the Deposit Insurance Corporation began functioning on 1 January 1962. India was among the earliest countries after the United States to adopt deposit insurance.
• The merger: the Credit Guarantee Corporation of India, set up in 1971 to guarantee advances to small borrowers, was merged with it in 1978 to form the Deposit Insurance and Credit Guarantee Corporation, and the Act was renamed accordingly.
• Credit guarantee discontinued: the credit guarantee function has been in abeyance since 2003, so the Corporation now performs only the deposit insurance function, despite its name.
• Constitution: the Corporation is a wholly owned subsidiary of the Reserve Bank, with a capital subscribed by it, and its board is chaired by a Deputy Governor of the Reserve Bank.
• The fund: premiums are credited to a Deposit Insurance Fund, out of which claims are settled, and which is invested in Central Government securities.

2. Which Banks Are Covered

• Registration: the Act applies to insured banks, that is banks registered with the Corporation. Registration is effectively automatic for an eligible bank on its being licensed.
• Banking companies: all commercial banks, including public sector banks, private sector banks, foreign banks operating branches in India, regional rural banks, local area banks, small finance banks and payments banks.
• Cooperative banks: State, central and primary cooperative banks in the States and Union territories which have amended their cooperative societies law to provide for the Reserve Bank to order winding up or supersession, which all of them have done.
• Not covered: primary cooperative societies that are not banks, and institutions that are not banks at all, so deposits with a non-banking financial company, a chit fund or a cooperative credit society carry no insurance.
• De-registration: a bank may be de-registered if it ceases to be eligible or fails to pay the premium for three consecutive periods, and the Corporation must publicise the fact so that depositors know the cover has gone.

3. What Is Insured

Figure 2: The scope and limits of the cover

• All deposits in principle: savings, current, fixed, recurring and other deposits are insured, and the cover extends to principal and interest together.
• Excluded deposits (Section 2(g)): deposits of a foreign Government; deposits of the Central or a State Government; inter-bank deposits; deposits of a State Land Development Bank with the State cooperative bank; amounts due on account of a deposit received outside India; and any amount specifically exempted by the Corporation with the previous approval of the Reserve Bank.
• The limit: five lakh rupees per depositor per bank, raised from one lakh with effect from 4 February 2020. The limit had been one lakh since 1993.
• Per bank, not per branch: all the deposits a person holds across every branch of the same bank are aggregated and covered once.
• Same right and same capacity: deposits held in different rights and capacities are insured separately. A sole account, an account as guardian for a minor, an account as partner of a firm, an account as director of a company and an account as trustee each attract their own cover. Joint accounts with different combinations of names, or in different orders of names, are treated as held in different capacities for this purpose.
• Compulsory, not optional: the cover is automatic. A depositor neither applies for it nor pays for it.

4. The Premium

• Who pays: the insured bank, not the depositor. The Act expressly forbids the bank to pass the premium on to its depositors.
• The rate: twelve paise per hundred rupees of assessable deposits per annum, raised from ten paise with effect from 1 April 2020. The Corporation may vary the rate with the Reserve Bank's approval, subject to the statutory ceiling.
• Payment: premium is paid half yearly in advance, on the basis of the deposits at the end of the preceding half year, with interest payable on default.
• From flat rate to risk based: from 1962 every bank paid the same rate regardless of its riskiness, a recognised weakness. By a press release of 6 February 2026 the Corporation, with the Reserve Bank's approval, adopted a risk based premium framework with effect from 1 April 2026. Twelve paise remains the card rate, but a sounder bank earns a risk incentive of up to one third and a vintage incentive of up to a quarter for a long record without claims. Scheduled commercial banks other than regional rural banks are rated under one model, and regional rural banks and cooperative banks under another, while local area banks and payments banks continue to pay the card rate. Ratings and premiums are kept confidential, so the framework does not publicly signal which banks are weak.

5. When the Corporation Pays

• Liquidation or reconstruction (Section 16): the Corporation is liable to pay every depositor the amount of his deposit, up to the limit, where a winding up or liquidation order is made in respect of an insured bank, or where a scheme of compromise, arrangement, reconstruction or amalgamation is sanctioned under which depositors do not get credit for the full amount of their deposits.
• Procedure: the liquidator must furnish the Corporation with a list of depositors and their entitlements within the prescribed period, and the Corporation pays the liquidator, who distributes to the depositors.
• Recovery (Section 21): the liquidator, or the transferee bank under a scheme, must repay the Corporation out of what is realised for the amounts it has paid, so that the Corporation in effect stands in the depositor's place to the extent of its payment and recovers what it can from the estate.
• Interim payment (Section 18A): inserted by the Deposit Insurance and Credit Guarantee Corporation (Amendment) Act, 2021 with effect from 1 September 2021, this is the most important recent change. Where a bank is placed under all inclusive directions restricting withdrawals, the depositor need no longer wait for liquidation. The insured bank must furnish a list of claims within forty five days, the Corporation verifies and settles within a further period, and payment must be made within a total of ninety days.
• Why Section 18A matters: before it, a depositor of a bank under directions could be locked out for years, as happened with the Punjab and Maharashtra Cooperative Bank from 2019. The insurance was real but unreachable. Section 18A made the cover effective at the moment the depositor actually needs it.

6. Questions Arising

Is five lakh rupees enough?

By number of accounts it covers almost everyone, and the stated policy objective of insuring the great majority of depositors in full is met. By value of deposits the proportion covered is much smaller, because a few large accounts hold a large share of the money. The limit has been revised rarely, in 1993 and again in 2020, so inflation erodes it between revisions, and raising it has been under consideration. Any increase must be funded by a higher premium, which banks pass into their cost of funds.

Does deposit insurance create moral hazard?

Yes, and the law tries to contain it rather than eliminate it. If deposits are guaranteed, depositors stop monitoring their bank and a weak bank can raise money as cheaply as a strong one. The answers are the cap on the amount insured, which leaves large depositors exposed, and prudential regulation, which does the monitoring that depositors no longer do. The risk based premium in force from 1 April 2026 addresses it more directly, by making a riskier bank pay more for its cover.

7. Quick Revision

8. Frequently Asked Questions

How much of a bank deposit is insured in India?

Five lakh rupees per depositor per bank, covering principal and interest together, with effect from 4 February 2020. All the accounts a person holds in the same right and capacity across every branch of the same bank are aggregated and covered once.

Which deposits are not insured?

Deposits of a foreign Government; deposits of the Central or a State Government; inter-bank deposits; deposits of a State Land Development Bank with the State cooperative bank; amounts due on a deposit received outside India; and any amount specifically exempted by the Corporation with the Reserve Bank's previous approval.

Who pays the deposit insurance premium?

The insured bank, at a card rate of twelve paise per hundred rupees of assessable deposits per annum since 1 April 2020, paid half yearly in advance, and from 1 April 2026 reduced for sounder banks under the risk based premium framework. The bank is forbidden to pass the premium on to depositors, who pay nothing and need not apply for the cover.

What is Section 18A of the DICGC Act?

A provision inserted in 2021, effective 1 September 2021, requiring the Corporation to pay insured depositors of a bank placed under all inclusive directions within ninety days, without waiting for liquidation. The bank must furnish the list of claims within forty five days, and the Corporation verifies and pays within the remaining period.

Are deposits with a cooperative bank or an NBFC insured?

Cooperative banks are insured, because the States have amended their cooperative societies laws to permit the Reserve Bank to order winding up or supersession, which is the condition of eligibility. Non-banking financial companies, chit funds and cooperative credit societies that are not banks are not insured, and a deposit with them carries no statutory guarantee at all.

Are deposits in every kind of bank insured on the same terms?

Yes, and that uniformity is the scheme's most important feature. The Corporation insures deposits in commercial banks, including local area banks, small finance banks, payments banks and regional rural banks, and in cooperative banks, on identical terms. The cover is the same figure per depositor per bank, covering principal and interest together, and applied to the aggregate of the depositor's accounts held in the same right and the same capacity. A depositor who wants more cover must either spread the money across different banks or hold it in a genuinely different capacity, for instance individually in one account and as a trustee in another, since balances held in different rights and capacities are insured separately.

9. Related Topics and Provisions

• Winding up of banking companies
• Moratorium and reconstruction under Section 45
• Inspection, directions and penalties
• Structure of the Indian banking system
• Financial stability and systemically important banks