Much-needed succour

The Deposit Insurance and Credit Guarantee Corporation (DICGC) Amendment Bill was passed in the Lok Sabha on August 9, 2021. The Bill, which was already passed in the Rajya Sabha, has now become an Act. DICGC, a wholly-owned subsidiary of the Reserve Bank of India, provides insurance cover on bank deposits. According to the provisions of the amended Bill, people will be given an insurance guarantee on deposits up to Rs five lakh in case of bank sinking. The depositors will be allowed to withdraw their deposits up to the said limit from the bank within 90 days.

The amendment to the Deposit Insurance and Credit Guarantee Corporation (DICGC) Act, 1961 aims to instil confidence among depositors regarding the safety of their money. It aims at facilitating the depositors to access their savings through deposit insurance in a time-bound manner in the event of suspension of the banking business of the insured bank under various provisions of the Banking Regulation Act, 1949. It is noteworthy that Finance Minister Nirmala Sitharaman had announced about amendments to the Deposit Insurance and Credit Guarantee Corporation Act, 1961 in the General Budget on February 1, 2021.

Finance Minister Sitharaman said that at present it takes eight to 10 years for the depositors of stressed banks to get their assured money and other claims, but after the implementation of this law, the depositors of distressed banks will get their deposits back in 90 days. She also said that 23 cooperative banks, including Punjab and Maharashtra Cooperative Bank (PMC), were in trouble during 2019, due to which depositors had to face many problems. Now the immediate benefit of this amendment will be given to the customers of these cooperative banks.

Significantly, after the sinking of PMC Bank, thousands of customers of this bank had to face financial pressure. Still, the Reserve Bank of India has not removed all the restrictions imposed on this bank. After the PMC crisis, there was a constant demand to increase the insurance cover of Rs one lakh given by the DICGC to the depositors of banks, due to which, finally the government had to amend the existing Act to increase the amount of insurance cover from Rs one lakh to Rs five lakh.

According to Nirmala Sitharaman, after this amendment, 98.3 per cent of the total deposit accounts and 50.9 per cent of the total deposit value will come under the revised insurance cover. Sitharaman said that the sole purpose of amending the deposit insurance guarantee is to provide relief to bank customers. As per the amendment made in the Act, after 45 days from the date of ban or suspension on transaction of any bank by the Reserve Bank of India, the claims of all the depositors will be collected and submitted to the DICGC. DICGC will settle all claims within 90 days.

As per data of scheduled commercial banks as of June 30, 2021, the average amount per account as the fixed deposit is Rs 2.54 lakh, while the overall average amount, which includes savings accounts, current accounts, and fixed deposit accounts, is only Rs 58,316. 67 per cent of fixed deposit accounts have deposits below Rs one lakh, while only 8.6 per cent of those above Rs one lakh. Similarly, the average deposit amount in the current account is Rs 1.51 lakh and the savings account is Rs 0.19 lakh, whereas in our country the deposit amount above 15 lakhs is just 1.3 per cent, which is 55 per cent of the fixed deposits available in the banking system. In this way, small depositors cannot be affected in any way in the event of a bank going bankrupt, as they are covered almost 100 per cent in revised insurance cover.

A special platform has been developed to solve the problems of investors when banks go bankrupt in different countries of the world like the US and Europe. Till the latest amendment in the Deposit Insurance and Credit Guarantee Corporation Bill, there was no concrete provision available to solve the problems of investors in case of bankruptcies of banks in India. From this point of view, this amendment is a welcome move of the government.

Though the Deposit Insurance and Credit Guarantee Corporation Bill 2021 has been passed, the bank failure cases in India are still non-existent. So far DICGC has had to settle very few claims. Most of such claims are from cooperative banks, which is because cooperative banks in India largely fund themselves through retail and bulk deposits, which are identified as a source of risk in other countries.

Banks in India have been providing insurance cover at a fixed instalment rate of Rs one lakh per depositor since May 1993, but there has been a long delay in linking the risk rating of the bank to the insurance premium as per international practices. To rationalize the rate of insurance premium, what is needed today is that banks should be classified into risk categories based on adequate availability of capital, quality of credit and non-performing assets (NPA) and then, on the basis of these, the insurance premium should be fixed. By doing this, the bank with the high-risk category will have to pay more insurance premiums. Obviously, banks offering higher insurance premiums would like to reduce the rate of insurance premiums to cut down on their expenses and for this, they will continue to try to either reduce or eliminate their risk factors in a planned manner.

It can be said that "the purpose of the Deposit Insurance and Credit Guarantee Corporation (Amendment) Bill 2021 is to ensure the protection of the interests of banks and their investors in the event of failure of banks. The failure of banks can affect the financial stability of the country, as they hold deposits of people, provide loans to the public and businessmen as per the need, and invest in big projects to strengthen the economy.

Views expressed are personal