Changes to deposit insurance

Relevance: Deposit Insurance Credit Guarantee Corporation (DICGC) bill will protect the interest of consumers.

Synopsis: How the New Amendments to the Deposit Insurance Credit Guarantee Corporation (DICGC) Act will help depositors cause?

Background

• Recent events related to Punjab & Maharashtra Co-operative (PMC) Bank, Yes Bank, and Lakshmi Vilas Bank have put a spotlight on the issue of deposit insurance.
• Consequently, the Union Cabinet cleared amendments to the Deposit Insurance Credit Guarantee Corporation (DICGC) Act.
• It brings relief to depositors of stressed banks placed under a moratorium.
• The amendment will help depositors access their deposits up to ₹5 lakh within just 90 days if their bank gets in trouble, and is placed under a moratorium.
• The new rule will apply to all commercial banks and branches of foreign banks operating in India.

What is deposit insurance?

• In an unlikely event of a bank failure in India, a depositor can claim 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 collapse.
• The depositors enjoy the highest safety on their funds parked with banks, unlike the equity and bond investors in the banks.

How will the changes benefit account holders?

1. First, the depositors normally end up waiting for 8-10 years. Now depositors will get insurance money within 90 days in the event of a bank coming under the moratorium, without waiting for eventual liquidation of the distressed banks.
   • Within the first 45 days of the bank being put under a moratorium, the DICGC would collect all information relating to deposit accounts.
   • In the next 45 days, it will review the information and repay depositors closer to the 90th day.
2. Second, this will cover banks already under the moratorium and those that could come under the moratorium. This will be beneficial to depositors of PMC Bank, under moratorium since September 2019, with depositors not being able to access funds beyond Rs 1 lakh.

Who pays for this insurance?

• 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 DICGC.
• The premium for this insurance is paid by banks to the DICGC and not be passed on to depositors.
• Banks currently pay a minimum of 10 paise on every Rs 100 worth of deposits to the DICGC as premium, which is now being raised to a minimum of 12 paise.