The Silicon Bank Valley (SVB) crisis offers many lessons to governments and central banks elsewhere. The crisis, essentially an outcome of failure of investment-risk assessment and asset liability mismatch. Under the US deposit insurance rules, every insured depositor will get up to a ceiling of $ 250000 but in the case of SVB collapse, the authorities have said that all depositors will get their money back.

In India, just as the FDIC does in the US, the Reserve Bank of India’s subsidiary, Deposit Insurance and Credit Guarantee Corporation (DICGC) manages a deposit insurance programme that covers deposits in the case of bank failures. The DICGC insures all deposits such as savings, fixed, current, and recurring deposits. This maximum insured amount is Rs 5 lakh per bank account, including principal and interest.

But is the Rs 5 lakhs limit adequate? Let’s look at the Indian scenario. To be sure, unlike in US there haven’t been big bank failures in India in recent years. A few cases where banks plunged into financial weakness (Yes Bank, LVB, PMC) were dealt swiftly by takeovers or bailouts by stronger banks. Of course,

there have been several bank closures among cooperative banks though. One unintended consequence of banking failures in US will be that depositors will tend to move away their money from smaller banks to bigger banks. This is because of a widening trust deficit. In India too smaller banks may face a tough time ahead.

In this backdrop, there have been demands for a higher safety net for depositors of troubled banks. There is a view that even the Rs 5 lakh deposit insurance cover that was hiked not long ago is not enough, considering the increase in appetite for bank deposits as a safe option compared with other asset classes, especially by senior citizens. In the event of a bank failure, there is no assurance for high-value depositors that they will get the refund in a timebound manner.

According to the government, with the last year amendment in the DICGC Bill, the deposit insurance coverage in India has gone up to 98.3 percent and covered deposit value has risen to 50.9 percent against the comparative numbers globally — 80 percent and 20-30 percent, respectively.

The deposit insurance guarantee scheme was set up in 1961 to ensure depositors are assured of at least some amount in return in the event of a bank collapse. This amount was enhanced to Rs 1 lakh only in 1993 from Rs 30,000.

The DICGC enhanced the cover to Rs 1 lakh per depositor in May 1993 for deposits of commercial banks, RRBs, local area banks (LABs) and co-operative banks and the rest of the deposit amount is forfeited in the rare event of a bank failure. A further increase to Rs 5 lakh happened in 2021.