Role of deposit insurance in protecting the economy of India

Irregularities and deficiencies in the banking systems, if not checked timely, could lead to financial crisis which may bear a substantial cost to the economy. Recent examples of such crisis are sub-prime lending crisis of USA in 2009 and the current European crisis where many countries have been given bail-out packages multiple times to stabilize their economies. Since the world today is globalized, the emergence of cross-border banking and stability of the banking sector in an economy is of utmost importance for the domestic economy as well as the foreign economies. In order to limit the contagion of the failure of Bank(s), the countries have evolved safety nets to meet the emergencies in the banks partially or wholly. Safety nets are of two types: Lender at the Last resort and Deposit Insurance. In Lender at the last resort, whenever banks facing liquidity crunch are unable to raise their funds from other sources to meet their obligations, the Central bank lends them funds at the last. However the banks may not prefer this solution as it may affect the reputation of the banks. As a result, the only solution left is the Deposit Insurance. This paper focuses on analyzing How the Deposit Insurance scheme plays a vital role in a big economy like India and the major issues related to this scheme.