Frequently asked questions about NDIC

What is deposit insurer? Ans:

Deposit Insurance is a system established by the Government to protect depositors against the loss of their insured deposits placed with member institutions in the event a member institution is unable to meet its obligations to depositors. Deposit Insurance ensures that the depositor does not lose all his money in the event of a bank failure. It also engenders public confidence in, and promotes the stability of, the banking system by assuring savers of the safety of their funds. Deposit Insurance makes a bank failure an isolated event, hence it eliminates the danger that unfounded rumours will start a contagious bank run.

Why is deposit insurer necessary? Ans:

Financial institutions differ from most industrial and commercial enterprises in that they depend mainly on deposits mobilized from the public for their working capital and are highly leveraged. If a financial institution is unable to meet its obligation to depositors due to operational problems or business failure, anxious depositors may cause a run on the bank as well as other healthy institutions.

The stability of the financial system and social order in general would also be at risk. Moreover, most depositors have small deposit amounts and therefore cannot cost-effectively collect and analyze information on the financial institutions they do business with. The government has therefore established a deposit insurance mechanism, under which the NDIC is empowered to provide protection for small depositors and contribute to financial and social order. To be continued!