The Union budget has proposed to raise the bank deposit insurance limit by five times to Rs 5 lakh, providing relief to depositors who have been rattled by the recent crisis in a cooperative bank.

“The Deposit Insurance and Credit Guarantee Corporation (DICGC) has been permitted to increase deposit insurance coverage for a depositor, which is now Rs 1 lakh, to Rs 5 lakh per depositor,” finance minister Nirmala Sitharaman said while presenting the 2020-21 budget on Saturday.

The much-awaited increase comes after a long gap of 27 years. There have been calls for the deposit insurance cover, which includes both principal and interest, to be raised, particularly after the developments at PMC Bank, which affected several depositors.

Despite the increase, there is a view that it may be inadequate. In November, the All India Reserve Bank Employees Association had urged the Centre to hike the insurance cover to at least Rs 10 lakh. It had said that in dollar terms, the proposed cover of around $14,000 is much lower than in many other countries.

The deposit insurance premium paid by the banks to the DICGC is borne entirely by the insured lender.

The DICGC insures all bank deposits, that includes savings, fixed, current and recurring deposits. However, deposits by foreign governments, central and state governments and inter-bank deposits are not insured.

If a bank goes into liquidation, the DICGC is liable to pay to each depositor through the liquidator up to the insured amount within two months from the date of receipt of the claim list from the liquidator.

All commercial banks, including the branches of foreign banks that are operating in India, local area banks, regional rural banks and cooperative banks are covered under the deposit insurance scheme.

According to the norms, if an individual has multiple accounts (like a savings account and a recurring deposit) in one bank, the depositor will get insurance over up to the insured amount which now stands revised to Rs 5 lakh. However, if the individual has deposits in more than one bank, the deposit insurance coverage limit is applied separately to the deposits in each bank.

Abizer Diwanji, partner and leader, financial services, EY India, said that the increase in deposit insurance to Rs 5 lakh would increase the bank premia costs.