What is DICGC its Working & DICGC Insured Bank Means

With the Silicon Valley Bank collapse, it’s clear that no matter how big the banks may be, your deposits are not 100% safe at all times. Many banks have failed to protect depositors’ money in recent times in India as well. These include the likes of Yes Bank, Punjab National Bank, Punjab, and Maharashtra Cooperative Bank, and Lakshmi Vilas Bank among others. Many other banks were on the brink of collapse and had to be rescued, like IDB Bank. 

All these collapses are a consequence of ballooning NPAs and the lack of proper corporate governance. All this affects the depositor's wealth and therefore their confidence in the banking system. This is why the Deposit Insurance and Credit Guarantee Corporation (DICGC) was set up by the RBI in 1978. 

It is a wholly-owned subsidiary of RBI that insures user deposits. The DICGC is liable to pay in case the bank is not able to fulfill its obligations to the depositors because of too many bad loans, too little liquidity to pay interest to depositors, or simply insolvency. Before 2020, the insured limit was ₹1 lakh. But in the wake of the recent precarious environment, the insurance limit under DICGC was raised to ₹5 Lakhs in 2020. 

How Does Insurance Protection Work Under the DICGC Scheme?

If a bank goes bankrupt and gets liquidated, the DICGC will pay each depositor up to ₹5 lakhs within two months of receiving the claim list from the liquidator (bank). The bank will distribute the payment to each depositor according to their claim amount.

In case the bank where you have deposited your money in undergoes a merger or restructuring, even then the DICGC will compensate you. You will get your deposit amount or the insurance limit, whichever is lower. This compensation will be made within two months of receiving your claim from the new bank or the CEO of your old bank/new bank. 

What’s the Process of Dealing with Depositors of Failed Banks?

Here’s the step by step process: 

1. In the event of a bank's liquidation, the liquidator (bank) prepares a depositor-wise claim list and sends it to the DICGC for scrutiny and payment.
2. The DICGC pays the money to the bank who is liable to pay the depositors who have lost their money. If there is an amalgamation or merger of banks, the amount due to each depositor is paid to the new entity bank.
3. It’s the bank’s responsibility to pay back the depositors. If a bank doesn't pay its insurance premium for three periods, the DICGC can cancel its registration. This means the bank will not be insured anymore.  This can also happen if the bank stops taking deposits, gets its license canceled, merges with another bank, or is wound up. However, the bank's deposits will still be insured by the DICGC until the cancellation date.

How Is the Insurance Coverage Decided For Each Depositor? 

If someone opens multiple deposit accounts of the same type (e.g. savings or fixed deposit) in one or more branches of a bank, the balances in all those accounts will be added up and insured up to a maximum of ₹5 lakhs. 

But if they open different types of accounts (e.g. personal and joint accounts) or hold accounts in different capacities (e.g. as a partner or trustee), each account will be insured separately up to a maximum of ₹5 lakhs.

What are Joint Accounts?

If person A opens a joint account with B in a bank, then their money is insured for up to ₹5 Lakhs under the DICGC. In case they have another account with the same branch of the bank, in the same order (First a/c holder A and Second a/c holder B), the total amount clubbed together is insured up to ₹5 lakhs. 

However, if they are held in a different branch in a different order (First a/c holder B and Second a/c holder A), then each deposit is insured up to ₹5 lakhs.

1. Sole proprietor

If someone is a sole proprietor and has personal and business deposits, the balances will be added up and insured up to a maximum of ₹5 lakhs. 

If person A opens another account apart from a personal account in the capacity of a partner for a firm, guardian to a minor, director of a company or a trustee of a trust - then each account is individually insured up to ₹5 Lakhs.

The Key Takeaway

The DICGC was incorporated to protect the interest of depositors. So knowing what it clauses are helps you understand how best to protect your money. It also aids in giving you a strategy to maximize the safety of your wealth. In an environment where banking keeps having bouts of turbulence, take advantage of the rules laid out to protect your money to its full potential.