- Recent troubles for depositors in getting immediate access to their funds in banks such as Punjab & Maharashtra Co-operative (PMC) Bank, Yes Bank and Lakshmi Vilas Bank has put spotlight on the subject of deposit insurance.
- The Union Cabinet Wednesday, 28th July 2021, cleared changes to the deposit insurance laws to provide funds up to Rs 5 lakh to an account holder within 90 days in the event of a bank coming under the moratorium imposed by the RBI.
- Earlier, account holders had to wait for years till the liquidation or restructuring of a distressed lender to get their deposits that are insured against default. The Centre plans to introduce the Deposit Insurance & Credit Guarantee Corporation (Amendment) Bill 2021 in the ongoing Monsoon session of Parliament.
What is deposit insurance?
- Currently, in an unlikely event of a bank failing in India, a depositor has a claim to a maximum of Rs 5 lakh per account as insurance cover.
- The cover of Rs 5 lakh per depositor is provided by the Deposit Insurance and Credit Guarantee Corporation (DICGC), which is a fully owned subsidiary of the Reserve Bank of India.
- Depositors having more than Rs 5 lakh in their account have no legal recourse to recover funds in case a bank collapses. While the depositors enjoy the highest safety on their funds parked with banks, unlike the equity and bond investors in the banks, an element of risk always lurks on their deposits in case a bank collapses.
- The bill will cover 98.3% of depositors and 50.9% of deposit value in the banking system, way above the global level of 80% and 20-30%, respectively.
- It will cover all types of banks, which also include regional rural banks and co-operative banks.
- It will cover banks already under moratorium and those that could come under moratorium.
- Moratorium is a legally authorized period of delay in the performance of a legal obligation or the payment of a debt.
- It will provide funds up to Rs 5 lakh to an account holder within 90 days in the event of a bank coming under the moratorium imposed by the Reserve Bank of India (RBI).
- Earlier, account holders had to wait for years till the liquidation or restructuring of a distressed lender to get their deposits that are insured against default.
- The Rs 5-lakh deposit insurance cover was raised from Rs 1 lakh in 2020.
- The Damodaran Committee on ‘Customer Services in Banks’ (2011) had recommended a five-time increase in the cap to Rs. 5 lakh due to rising income levels and increasing size of individual bank deposits.
- Within the first 45 days of the bank being put under moratorium, the DICGC would collect all information relating to deposit accounts. In the next 45 days, it will review the information and repay depositors within a maximum of 90 days.
- It permits raising the deposit insurance premium by 20% immediately, and maximum by 50%.
- The premium is paid by banks to the DICGC. The Insured banks pay advance insurance premiums to the corporation semi-annually within two months from the beginning of each financial half year, based on their deposits as at the end of previous half year.
- It has been raised from 10 paise for every Rs 100 deposit, to 12 paise and a limit of 15 paise has been imposed.
- This is only an enabling provision and the determination of an increase in the premium payable would involve consultations with the RBI and require government approval.
About Deposit Insurance and Credit Guarantee Corporation
- It came into existence in 1978 after the merger of Deposit Insurance Corporation (DIC) and Credit Guarantee Corporation of India Ltd (CGCI) after passing of the Deposit Insurance and Credit Guarantee Corporation Act, 1961 by the Parliament.
- It serves as a deposit insurance and credit guarantee for banks in India.
- It is a fully owned subsidiary of and is governed by the RBI.
Source: Indian Express