Depositors to get up to Rs 5 lakh within 90 days if bank under moratorium

Relevance: The DICGC Bill provide big relief to small depositors

Synopsis: 

The Union Cabinet has cleared the Deposit Insurance and Credit Guarantee Corporation (DICGC) Bill, 2021 which will allow depositors to withdraw up to Rs 5 lakh in 90 days.

About the Deposit Insurance and Credit Guarantee Corporation (DICGC) Bill, 2021

• The DICGC Bill, 2021, will cover banks that have been already placed under a moratorium and will insure savings deposits, fixed deposits, current and recurring deposits.

Procedure:

• Each depositor’s balance of ₹5 lakh is guaranteed for both principal and interest.
• In the first 45 days, after the bank is placed under a moratorium by the Reserve Bank of India (RBI), the lender will collect all depositor claims and submit them to DICGC.
• The corporation will process the claims in real time. Within 90 days, the process will be completed, even when the bank resolution is ongoing.
• For delay in payment of premium, the bank is liable to pay interest at the rate of 8 percent above the Bank Rate on the default amount from the beginning of the relevant half-year till the date of payment.

What is DICGC and how it will function?

• DICGC is a fully owned subsidiary of the Reserve Bank of India (RBI) and was established in the year 1978.
• DICGC collects insurance premiums from the insured banks for the administration of the deposit insurance system. The premiums to be paid by the insured banks are computed on the basis of their assessable deposits.
• 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 the previous half-year.
• The premiums paid by the insured banks to the DICGC are required to be borne by the banks themselves and are not passed on to the depositors.

What is Deposit Insurance Fund (DIF)?

The amount in Deposit Insurance Fund (DIF) is used for the settlement of claims of depositors of banks under liquidation, reconstruction and amalgamation.

The DIF is built out of the premium paid by insured banks and the coupon income received on investments in central government securities.

Significance of the changes:

• This will be the biggest relief to small depositors, nearly covering 98.3 percent of depositors and 50.9 percent of the deposit value.
  • Globally, the deposit insurance coverage was around 80 percent of all accounts and 20-30 percent of the deposit value.
• This would address the woes of depositors who were not able to get their funds due to problems of banks.
• Normally, it takes about 8-10 years, after the complete liquidation of the bank, to get the depositors’ money. But the bill will provide it within 90 days of the RBI’s imposition of a moratorium on a bank’s operations.

Challenges:

• The revival of banks facing problems will become difficult as they will have to return money to the depositors.
• Although the change will cover 98.3 percent of accounts, there is certainly scope for raising the limit further. Since the middle-income depositors may still not get full benefit in the case of a failure of a bank.
  • Currently, they rely upon a merger with another bank as a bailout to take care of customers’ money.