NEW DELHI: A possible hike in the deposit insurance ceiling from Rs5 lakh to Rs10 lakh – which the government is actively considering, according to a media report – could pave the way for more deposits to flow into small finance banks (SFBs).
It’s a known fact that SFBs offer some of the highest fixed deposit rates in the market but face perception barriers around safety.
While the finance ministry is still evaluating how much to raise the cap on deposit insurance — a move being actively considered within the next six months — officials have indicated it may fall below the Rs10 lakh mark.
That would double the current protection limit introduced in February 2020, in the aftermath of the Punjab and Maharashtra Co-operative Bank (PMC Bank) collapse.
Market watchers believe that even a marginal increase in the insured threshold will help reduce depositor anxiety — especially at SFBs, which offer interest rates as high as 9.2 per cent per annum, significantly higher than what is available at traditional large banks.
Who’s offering what
As of June 2025, Fincare Small Finance Bank offers 9.21 per cent to senior citizens on 750-day deposits, while Utkarsh, Suryoday, and Unity Small Finance Bank all offer around 9.10 per cent on select tenures for older investors.
Even for general customers, North East Small Finance Bank provides 9 per cent for 18-month deposits — one of the highest in the system.
Despite these attractive returns, large depositors often hesitate to place more than Rs5 lakh in these banks — precisely because that’s where the Deposit Insurance and Credit Guarantee Corporation (DICGC) insurance cap ends.
Risk: mostly perception
While co-operative banks have occasionally triggered alarm, the track record of SFBs in returning depositor money has remained clean.
“No small finance bank has refused withdrawals or returned money late in the recent past. The risk is largely perceived — and to an extent, misplaced,” said a person familiar with the regulatory view.
Banking sources say that a higher deposit insurance limit may be just what’s needed to help break the psychological barrier for many middle-class households looking to make the most of high-yield options, particularly retirees and fixed-income investors.
“Today, a Rs9 lakh FD with a top SFB can yield returns that beat inflation and match post-tax debt fund yields. The only hesitation is: will I get my money back in a crisis?
With a Rs10 lakh cover, that question fades,” said a senior private banker.
Policy trigger
The Rs5 lakh cover currently fully protects 98 per cent of accounts, but only about 43 per cent of the total deposit value, according to DICGC data. That makes the system secure for the masses but limiting for large depositors.
A higher cover, even if marginally increased, could act as a confidence booster — not just for depositors but also for the SFB sector as a whole, which is already under regulatory oversight and has seen improved asset quality and capital buffers in recent years.
A higher deposit insurance cap may prompt some investors to return to bank FDs, which they previously avoided due to safety concerns, and had instead parked money in mutual funds and insurance products.
If the insurance limit is raised — and that remains a big “if” — it may trigger a quiet shift of funds into high-return avenues already within the regulated system.
