Karnataka High Court Upholds DICGC's Priority Right To Recover Depositor Payouts From Insured Banks

The Karnataka High Court has upheld the law allowing the Deposit Insurance and Credit Guarantee Corporation (DICGC) to recover amounts paid to depositors directly from a failed bank, with priority over other liabilities, ruling that the premium charged need not be proportionate to the insured amount.

A Division Bench of Chief Justice Vibhu Bakhru and Justice C.M. Poonacha dismissed a writ appeal filed by a depositors' society (Sangha) arising from the collapse of Sri Guru Raghavendra Sahakara Bank, affirming a Single Judge's September 1, 2025 order upholding the provisions of Deposit Insurance and Credit Guarantee Corporation Act, 1961.

Upholding the priority accorded to DICGC, the court said:

“The provision for repayment to the Corporation in priority over other deposits does place the Corporation in a better position in terms of priority, than it would have been, if it were accorded the same status as the depositors to whom payments have been made by it. However, in our view, this does not render the statutory provisions vulnerable to challenge on the ground of manifest arbitrariness.”

The dispute arose after the Reserve Bank of India imposed restrictions on the cooperative bank on January 10, 2020 following serious financial irregularities. After amendments in 2021, DICGC paid over Rs. 712 crore to more than 22,000 depositors and subsequently sought to recover that amount from the bank itself, triggering the challenge.

The petitioners challenged the amended framework, arguing that it allows DICGC to pay insured depositors upfront and then recover those amounts from the bank while being given priority over other liabilities and restricting payments to other creditors until DICGC is repaid.

They contended that this departs from traditional insurance principles and is manifestly arbitrary since the payout is capped at Rs. 5 lakh per depositor while premiums are collected on total deposits.

Rejecting these contentions, the court held that the scheme is a statutory mechanism aimed at protecting small depositors and ensuring financial stability, and cannot be equated with private insurance principles.

“We are unable to accept the contention that the amount collected by the concerned bank from a particular depositor and paid as a premium to the Corporation must be proportionate to the payout in the event of the bank's failure. The maximum risk covered by the bank for repayment of the sums is capped at `5,00,000/-. The premium is collected by the Corporation to fund coverage of the risk in the event of bank failures. The fact that the premium is collected on the value of the deposits and is not proportionate with the risk covered in case of a particular deposit, cannot be considered as manifestly arbitrary.”

The bench further clarified that the premium is a statutory exaction and not a voluntary payment for entering a contract of insurance.

“Undisputedly, the amount paid to cover the risk is a small fraction of income from interest on deposits. It is also important to bear in mind that income by way of interest is also in proportion to the quantum of deposit. In the aforesaid view we are unable to accept that the impugned provisions are capricious, irrational or bereft of any basis. The imposition of fee/ premium is a statutory exaction and not a voluntary payment for entering a contract of insurance. Thus, the assumption that the levy must be commensurate with the payout in the event of bank defaults is erroneous.”

On the issue of quantum of premium, the court held that determining the appropriate premium is a policy matter for the Corporation and rule-making authorities and not subject to judicial review merely on grounds of excessiveness.

“The question as to what is the appropriate premium to be collected is a matter for the Corporation and the rule-making authorities. We do not think it apposite for this Court to judicially review the quantum of insurance premium collected by the Corporation. The fact that the Corporation's balance sheet is strong only indicates that the Corporation is in a position to discharge the obligations that it has undertaken and may be in a position to expand its reach. This Court cannot examine as to what should be the optimum reserves to be maintained by the Corporation. That decision would be outside the scope of judicial review.”

Dismissing the appeal, the court held that granting DICGC priority in recovering its dues from the bank serves the broader public interest of maintaining the deposit insurance fund and ensuring protection for depositors across the banking system.