Deposit Insurance: the DICGC

In one line

Deposit insurance pays a bank's small depositors a guaranteed sum out of a fund the banks themselves have paid into, whether or not the failed bank has any assets left.

In the wording a student can write in an exam: the Deposit Insurance and Credit Guarantee Corporation is a wholly owned subsidiary of the Reserve Bank of India established under the Deposit Insurance and Credit Guarantee Corporation Act, 1961; it insures deposits in commercial banks, regional rural banks, local area banks, small finance banks, payments banks and co-operative banks up to a limit of five lakh rupees per depositor per bank, which was raised from one lakh with effect from 4 February 2020; and section 18A of that Act, inserted in 2021 and in force from 1 September 2021, requires interim payment to depositors of a bank placed under all-inclusive directions within ninety days.

Why insurance rather than a legal priority

Chapter 130 set out the problem. On Foley v. Hill the depositor is an unsecured creditor, so in a liquidation he ranks with the general body. Parliament's first answer was a statutory preference in section 43A of the Banking Regulation Act, 1949, and that preference is two hundred and fifty rupees, fixed in 1960 and never revised.

A preference has three defects, and each is fatal on its own.

It is only worth what the estate holds. A preference is a place in a queue, and if there is nothing to distribute, a first place is worth the same as a last.

It arrives when the liquidator can pay. Section 43A speaks of three months from the winding-up order, but section 43A(3) itself contemplates paying pro rata and paying the rest "as and when sufficient assets are collected", which can take years.

It depends on a winding up happening at all. A bank frozen under directions, with its depositors unable to withdraw, has no liquidation and therefore no preference.

Insurance answers all three. It is funded in advance by premiums, so payment does not depend on the failed bank's assets. It is a fixed sum, so the depositor knows what he will get. And since 2021 it is time-bound and does not require a winding up, which is the change that mattered most in practice.

So the right way to present this in an answer is as a shift, not as two unrelated topics: protection moved out of the Banking Regulation Act and into a dedicated statute and a dedicated corporation, and the fossil figure in section 43A is the evidence.

The Corporation

History, in three steps. The Deposit Insurance Corporation was established under the Deposit Insurance Corporation Act, 1961, following the failure of banks in the preceding years, the Palai Central Bank collapse of 1960 among them, which chapter 110 works through Vellukunnel. In 1971 a separate Credit Guarantee Corporation of India was set up to guarantee credit to small borrowers and priority sectors. In 1978 the two were merged into the Deposit Insurance and Credit Guarantee Corporation, which is why the Corporation carries both functions in its name.