The debacle of Punjab and Maharashtra Co-operative (PMC) Bank has brought back the focus on deposit insurance and depositors' protection. While the cooperative bank has not gone into liquidation, which triggers the insurance process, the risk to depositors' money cannot be ignored.

Deposit insurance ensures the depositor gets a certain amount, before the bank pays other parties it owes money to during the liquidation process. In India, deposits are insured up to ₹1 lakh-the limit was set in 1993 (up from ₹ 30,000), following three revisions over a 25-year period.

There are compelling reasons to increase the deposit amount eligible for insurance.

First, we compare very poorly with our Asian counterparts. The deposit insurance scheme of Philippines insures up to 500,000 pesos ($9,500) per depositor, while Thailand insures close to 5 million bahts ($160,000), according to respective central bank websites. In China, this insurance is for up to 500,000 yuan ($70,000) per depositor. At ₹1 lakh, India's coverage is a meagre $1,400.

Second, the Indian economy has changed drastically since then, with the average per capita income of Indians and financial savings improving. Much of the incremental savings continue to flow into bank deposits, despite several new financial instruments were made available to the public over the years. In FY17, bank deposits formed roughly 66% of the net financial assets of households, according to data from the Reserve Bank of India (RBI).

Another compelling reason for increasing the deposit insurance limit is the fall in coverage. As of March 2018, about 62% of individual deposit accounts had less than ₹1 lakh. Deposits of ₹1 lakh were at 90% of the total bank deposits in 1993 when the insurance limit of ₹1 lakh was set under the Deposit Insurance and Credit Guarantee Corporation Act, 1961. The size of deposits has gone up sharply and given that the insurance limit has remained unchanged, coverage has dropped.

India is a bank-led economy and banks command a large share of household savings. Implicit trust in banks has been formed painstakingly over the decades following nationalization, where the state offered to protect depositors' money. Indeed, no big bank has been allowed to fail. Even so, deposit insurance is a necessary comfort given to people who trust their savings with the banking system.