Mumbai, Feb. 3 -- The Union budget proposal to raise deposit insurance fivefold is expected to increase confidence in small private sector banks, small finance banks and cooperative banks, two industry officials said.

Against the backdrop of a shaky financial system and the recent collapse of the Punjab and Maharashtra Co-operative (PMC) Bank, the Union budget proposed to raise deposit insurance to Rs.5 lakh per depositor from the existing Rs.1 lakh. The greater cover is likely to assuage depositors and restore some faith in the financial system.

According to Anil Gupta, vice president and sector head of financial sector ratings at ICRA Ltd, the measure is expected to increase the deposits insured as a percentage of total deposits to ar...