Deposit Insurance and Credit Guarantee Corporation (Amendment) Bill

Deposit Insurance and Credit Guarantee Corporation (Amendment) Bill

Subject: Economy

Context: The Union Cabinet, on Wednesday, approved the Deposit Insurance and Credit Guarantee Corporation (Amendment) Bill.

Concept:

DICGC

• Deposit insurance is a protection cover for deposit holders in a bank when the bank fails and does not have money to pay its depositors.
• This insurance is provided by Deposit Insurance and Credit Guarantee Corporation (DICGC) which is a wholly owned subsidiary of the RBI.
• DICGC insures all bank deposits, such as savings, fixed, current and recurring deposit for up to the limit of Rs 5 lakh per bank.
• DICGC covers depositors of all commercial banks and foreign banks operating in India, state, central and urban co-operative banks, local area banks and regional rural banks provided the bank has bought the cover from DICGC.
• The DICGC does not include the following types of deposits:

1. Deposits of foreign governments.
2. Deposits of central/state governments.
3. Inter-bank deposits.
4. Deposits of the state land development banks with the state co-operative bank.
5. Any amount due on account of any deposit received outside India.
6. Any amount specifically exempted by the DICGC with previous approval of RBI.

Deposit Insurance and Credit Guarantee Corporation (Amendment) Bill.

• This will enable depositors access their deposits up to the sum prescribed under deposit insurance – ₹5 lakh – even if the bank is placed under moratorium.
• Depositors under the new mechanism, which means they can withdraw up to ₹5 lakh against ₹1 lakh once the Bill is passed in Parliament.
• As of now, depositors have to wait for liquidation or passage of resolution to get the benefit of deposit insurance. It normally it takes 8-10 years after complete liquidation to get money under insurance. Now even if there is a moratorium, within 90 days, the process will definitely be completed and, accordingly, give relief to depositors.
• Within the first 45 days of the bank being put under moratorium, the DICGC would collect all information relating to deposit accounts. In the next 45 days, it will review the information and repay depositors within a maximum of 90 days
• The government raised the deposit insurance to ₹5 lakh from ₹1 lakh. The government has also permitted raising the deposit insurance premium by 20 per cent immediately, and maximum by 50 per cent. The premium is paid by banks to the DICGC.
• It has been determined that 98.3 per cent in terms of the number of deposit accounts, and 50.9 per cent in terms of deposit value, of insurance will be covered. Globally, these numbers are 80 and 20-30 per cent, respectively
• The amendments to the Deposit Insurance and Credit Guarantee Corporation Act (DICGC) aims to streamline the provisions, so that if a bank is temporarily unable to fulfil its obligations, the depositors can get easy and time-bound access to their deposits to the extent of the deposit insurance cover.
• The proposed law is prospective, and not retrospective, but it will cover banks already under moratorium and those that could come under moratorium.
• Banks currently pay a minimum of 10 paise on every Rs 100 worth deposits to the DICGC as premium for the insurance cover, which is now being raised to a minimum of 12 paise.

What is a moratorium?

• The RBI, the regulatory body overseeing the country’s financial system, has the power to ask the government to have a moratorium placed on a bank’s operations for a specified period of time. Under such a moratorium, depositors will not be able to withdraw funds at will.
• RBI steps in if it judges that a bank’s net worth is fast eroding and it may reach a state where it may not be able to repay its depositors. When a bank’s assets (mainly the value of loans given to borrowers) decline below the level of liabilities (deposits), it is in danger of failing to meet its obligations to depositors.

Run on Banks

• A moratorium primarily helps prevent what is known as a ‘run’ on a bank, by clamping down on rapid outflow of funds by wary depositors, who seek to take their money out in fear of the bank’s imminent collapse. Temporarily, it does affect depositors.
• A moratorium gives both the regulator and the acquirer time to first take stock of the actual financial situation at the troubled bank. It allows for a realistic estimation of assets and liabilities, and for the regulator to facilitate capital infusion, should it find that necessary.

Can safety of funds be assured by RBI?

• It depends on whether the struggling bank or the regulator is able to find acquirers or investors to save the day. In the case of Yes Bank and Lakshmi Vilas Bank, the RBI was able to bring in investors who infused adequate funds.
• In the case of Punjab and Maharashtra Co-operative Bank, the moratorium — despite being gradually relaxed for depositors — is still in force, over a year after it was imposed, and there is still no sign of a buyer.