If you have been a part of the recent conversation about the depositor troubles, which, by the way, spread like fire, you know why it had become imperative to bring about this change. Banks like Punjab and Maharashtra co-operative, Yes Bank, and Lakshmi Vilas Bank have put into spotlight the problems faced by the depositors to have immediate access to their funds in the mentioned banks, bringing in a question mark the ever-so-hot topic of discussion- deposit insurance.
Well, suffice it to say a number of revisions have been done and we are going to tell you all about it. But before that, take note of the fact that one of the primary reasons for the government’s quick response has been their attempt to protect investor interests and improve confidence in banks for quite a while now. Even though it is still going to be a long journey, these revisions in deposit insurance are a good start.
Let’s start at the basics and explain as we move along.
Deposit insurance is primarily the safety cover that depositors achieve in the unfortunate event of the collapse of a bank. This means that an account holder’s deposits, in case of a bank’s bankruptcy, have a chance of recovery. Currently, that amount is at a maximum of INR 5 lakh, per account, in case of bank insolvency.
This amount is provided as an insurance cover by the Deposit Insurance and Credit Guarantee Corporation, a subsidiary headed by the Reserve Bank of India. While the government of India handles sanctioning and setting the adequate amount, insurance handling lies entirely delegated to the Reserve Bank’s subsidiary.
Note that the INR 5 lakh, per account, is the maximum insurance cover. This means that in the case of an account holder holding more than INR 5 lakh with a collapsing bank essentially has no legal cover to recover those funds. This means that even though deposit account holders have a much bigger safety net than that of investors in equity and bonds, it cannot be denied that the factor of risk is still essentially there.
Now, the revisions that have been made in the deposit insurance laws have been undertaken with respect to the duration of insurance reception. As mentioned, instances of delays in depositor funds have been highlighted time and again with the insolvency declarations of some big names of the country, prompting the changes. The Union Cabinet recently approved changes to the deposit insurance laws, prompting provision of funds up to INR 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.
The keyword in the last sentence is ’90 days’ since, as mentioned, the revisions in the existing deposit insurance laws had to be made with respect to the duration of fund provision. The maximum amount, however, has been kept at the same level. Before this change, depositors had to wait till the liquidation or restructuring of the insolvent bank before receiving their deposits that were insured against defaults. Unsurprisingly, this process took years and the duration of waiting for the insured depositors was considerably tedious.
The amended version of the Deposit Insurance and Credit Guarantee Bill 2021 is proposed to be introduced by the Centre to the parliament in the ongoing monsoon session.
Now, the question that primarily describes the success of this amendment is who pays for this Insurance?
Being aware of the bureaucratic lags of the country’s processes, the success of this amendment is contingent on the authorities responsible for it. As per the law, Deposits in public and private sector banks, local area banks, small finance banks, regional rural banks, cooperative banks, Indian branches of foreign banks and payments banks are all insured by the Deposit Insurance and Credit Guarantee Corporation. As mentioned, the complete ownership of DICGC lies with the Reserve Bank of India.
The money for this insurance is the amount transferred by banks to the DICGC, at the current rate of 10 paise on every INR 100 worth of deposits received by the banks. This amount is paid as the premium for the insurance cover, paid by the banks in a cyclical manner to the aforementioned subsidiary of the Central Bank. This premium on the insurance cover, to be paid by the banks, is now being raised to 12 paise on every INR 100 worth of deposits.
These amendments and changes to the deposit insurance have been very adaptive to the changing needs, for the country has witnessed some frequent changes over time. Just last year, the maximum limit of the insurance amount was raised from INR 1 lakh to the current cap of INR 5 Lakh. This was received as a significant alteration to the deposit insurance dynamic, and this duration change and premium increase further add to the agenda of ensuring depositor protection and less risk.
This step is said to bring about great change in the paradigm of deposit insurance.
It is because, prior to this revision, depositors that had their accounts in the banks that defaulted had to wait for about 8-10 years for the liquidation of the said bank, before receiving any funds. This not only weakened the investor confidence, especially with the recent increase in insolvent banks but also diminished the value of their money in the longer period owing to the inflation correspondence.
Thus, payment within 90 days of default would help solve both those problems and make it easier for investors and depositors to be able to trust the system. This amendment covers both- the banks that are already under the moratorium and those that could come under the moratorium. Within the initial 45 days of the bank being put under the ban, the DICGC would gather all data identifying with store accounts. In the following 45 days, it will audit the data and reimburse investors nearer to the 90th day.
This will be valuable to contributors of PMC Bank, under a ban since September 2019, with investors not having the option to get to assets past INR 1 lakh. However, the success of this amendment in bolstering investor sentiment and insurance payments would be widely dependent on its implementation, especially in the initial years. It is because these years would act as the building blocks to people’s perspective of the revision, and ultimately, the deposit insurance.
Therefore, undoubtedly, this revision is going to increase deposit holders’ benefit and would bring about a revolutionary stance in the perspective of tending to deposit insurance. Both increased duration and the revised premium amount would play important role in fulfilling the government’s desired objectives.
Edited by Aishwarya Ingle