QUESTION : Write a brief note on deposit insurance scheme and discuss its significance.
The Hindu Editorial Topic : PATCHWORK PROGRESS
WHY IN NEWS ?
The Government hopes to ring in fresh changes to the 1961 Deposit Insurance and Credit Guarantee Corporation (DICGC) law in the monsoon session, after the Cabinet nod this week.
MORE ABOUT THIS NEWS :
- From savers’ perspective, the most significant modification on the anvil is a 90-day deadline for the Corporation (DICGC) to remit the insured deposits of customers in troubled banks.
- Once the RBI imposes curbs on a bank, the clock will start ticking and by the 91st day or thereabouts, account holders will get their outstanding balance back with a cap of ₹5 lakh.
- Although this will not apply retrospectively, as per the Finance Minister this would apply to cases of lenders already under a moratorium.
o In the last two years, Yes Bank, Lakshmi Vilas Bank and the PMC Bank, have faced such a bar on depositors seeking to withdraw.
o PMC Bank accounts still face such curbs, even as savings parked in other co-operative lenders that have gone under continue to elude their rightful owners.
- Normally it takes eight to 10 years for insured deposits to be forked out, from the time a bank hits a hurdle and myriad conditions are imposed on withdrawals.
o But these delays were well-known last year too, when the insured deposit amount was raised to ₹5 lakh from ₹1 lakh laid down in 1993.
SIGNIFICANCE OF THE CHANGES :
- Making incremental changes in quick succession suggests a piecemeal approach to governance rather than a system-wide view, even though the government stressed it has been working ‘overtime’ to resolve the PMC Bank crisis.
- Nevertheless, given the rising distress in households and the downward momentum in savings levels due to the pandemic, this change must be allowed to make it through the din in Parliament.
- As per RBI data, ₹76.21 lakh crore or almost 51% of deposits are now insured, but 98.3% of all accounts have balances of ₹5 lakh or less so they are fully insured.
o This can be a source of renewed comfort for people in the banking system, grappling with bad loans, dwindling deposits and a still-fledgling insolvency framework.
DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPORATION(DICGC)
o 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.
o It serves as a deposit insurance and credit guarantee for banks in India.
o It is a fully owned subsidiary of and is governed by the RBI.
ITS COVERAGE :
o Banks, including regional rural banks, local area banks, foreign banks with branches in India, and cooperative banks, are mandated to take deposit insurance cover with the DICGC.
TYPES OF DEPOSITS COVERED :
o DICGC insures all bank deposits, such as saving, fixed, current, recurring, etc. except the following types of deposits:
- Deposits of foreign Governments.
- Deposits of Central/State Governments.
- Inter-bank deposits.
- Deposits of the State Land Development Banks with the State co-operative banks.
- Any amount due on account of any deposit received outside India.
- Any amount which has been specifically exempted by the corporation with the previous approval of the RBI.
o The Corporation maintains the following funds :
- Deposit Insurance Fund
- Credit Guarantee Fund
- General Fund
o The first two are funded respectively by the insurance premia and guarantee fees received and are utilised for settlement of the respective claims.
o The General Fund is utilised for meeting the establishment and administrative expenses of the corporation.
MEASURES NEED TO BE TAKEN AS WAY FORWARD :
- It is important for financial stability that people feel it is safer to park their money in a bank than stashing it under a mattress. For several people with limited financial literacy and access to retirement savings instruments, with lifetime earnings (possibly over ₹5 lakh) parked in a neighbourhood co-operative bank, this would still be a less than perfect outcome.
o The RBI needs to up its oversight game, and the Centre, which has recently made the Department of Cooperation a full-scale ministry, needs to allow it to do so.
- Moreover, just as the latest amendments have an enabling provision to raise the premium paid by banks to the DICGC in future, there should have been one to raise the insured deposit limit in line with inflation and per capita income trends.
- Making PSBs to have their deposits covered is similar to getting some other guarantee for the currency notes issued by the RBI.
- When the government can pay all the depositors, there is no need for any deposit insurance for PSBs.
- The DICGC should not be allowed to take from PSBs and give to co-operative banks.
- We can also bring private sector insurers and re-insurers in the deposit insurance segment which could drive down premium prices.
There should have been one to raise the insured deposit limit in line with inflation and per capita income trends.