Is depositors’ money safe?
- March 17, 2023
- Posted by: OptimizeIAS Team
- Category: DPN Topics
Is depositors’ money safe?
Subject : Economy
Section :Monetary policy
Serious thought to insuring deposits was given by the RBI and the Centre after the failure of the Palai Central Bank Ltd. and the Laxmi Bank Ltd. in 1960. The Deposit Insurance Act, 1961 came into force on January 1, 1962.
The preamble of the Deposit Insurance and Credit Guarantee Corporation Act, 1961 states that it is an Act to provide for the establishment of a Corporation for the purpose of insurance of deposits and guaranteeing of credit facilities and for other matters connected therewith or incidental thereto.
The Deposit Insurance and Credit Guarantee Corporation (DICGC) is a wholly owned subsidiary of the Reserve Bank of India, taking care of insuring bank deposits. The management of the Corporation vests with its Board of Directors, of which a Deputy Governor of the RBI is the Chairman.
Though the scheme’s prime objective is to protect bank depositors from the impact of bank failures, it has also served other unstated purposes like:
- Bailing out cooperative banks at the cost of commercial banks
- Generating income for the central government by way of income tax
- Penalising depositors of government banks without any utility
- Diverting sizable deposit funds to the DICGC.
Banks covered by Deposit Insurance Scheme
- All commercial banks including the branches of foreign banks functioning in India, Local Area Banks and Regional Rural Banks.
- Co-operative Banks – All eligible co-operative banks as defined in Section 2(gg) of the DICGC Act are covered by the Deposit Insurance Scheme. All State, Central and Primary co-operative banks functioning in the States/Union Territories which have amended their Co-operative Societies Act as required under the DICGC Act, 1961, empowering RBI to order the Registrar of Co-operative Societies of the respective States/Union Territories to wind up a co-operative bank or to supersede its committee of management and requiring the Registrar not to take any action for winding up, amalgamation or reconstruction of a co-operative bank without prior sanction in writing from the RBI, are treated as eligible banks. At present all Co-operative banks are covered by the Scheme. The Union Territories of Lakshadweep and Dadra and Nagar Haveli do not have Co-operative Banks.
Under Section 11 of the DICGC Act, 1961, all new commercial banks are required to be registered as soon as may be after they are granted licence by the Reserve Bank of India under Section 22 of the Banking Regulation Act, 1949.
Initially, under the provisions of Section 16(1) of the DICGC Act, the insurance cover was limited to 1,500/- only per depositor(s) for deposits held by him (them) in the “same right and in the same capacity” in all the branches of the bank taken together. However, the Act also empowers the Corporation to raise this limit with the prior approval of the Central Government. Accordingly, the insurance limit was enhanced from time to time as follows:
- 5,000/- with effect from 1st January 1968
- 10,000/- with effect from 1st April 1970
- 20,000/- with effect from 1st January 1976
- 30,000/- with effect from 1st July 1980
- 1,00,000/- with effect from 1st May 1993 onwards.
- 5,00,000/- with effect from 4th February 2020 onwards.
Types of Deposits Covered
DICGC insures all bank deposits, such as saving, fixed, current, recurring, etc. except the following types of deposits.
- Deposits of foreign Governments;
- Deposits of Central/State Governments;
- Inter-bank deposits
- Deposits of the State Land Development Banks with the State co-operative banks;
- Any amount due on account of and deposit received outside India
- Any amount which has been specifically exempted by the corporation with the previous approval of the RBI.
The Corporation has revised the premium further to 12 paise per 100 of assessable deposits per annum from the half year beginning April 1, 2020 onwards with the objective of maintaining a strong DIF.
The premium paid by the insured banks to the Corporation is required to be absorbed by the banks themselves so that the benefit of deposit insurance protection is made available to the depositors free of cost. In other words the financial burden on account of payment of premium should be borne by the banks themselves and should not be passed on to the depositors.
Under Section 15A of the DICGC Act, the Corporation has the power to cancel the registration of an insured bank if it fails to pay the premium for three consecutive half-year periods. However, the Corporation may restore the registration of the bank, which has been de-registered for non-payment of premium, if the concerned bank makes a request on this behalf and pays all the amounts due by way of premium from the date of default together with interest.
The Corporation has been paying income tax since 1987-88. It is assessed for Income Tax as a ‘company’ as defined under the Income Tax Act, 1961, is also subject to service tax on premium income from October 1, 2011 and is liable to Goods and Services Tax with effect from July 1, 2017.
The Government of India, in consultation with the Reserve Bank of India, introduced a Credit Guarantee Scheme in July 1960. The Reserve Bank of India was entrusted with the administration of the Scheme, as an agent of the Central Government, under Section 17 (11 A)(a) of the Reserve Bank of India Act, 1934 and was designated as the Credit Guarantee Organization (CGO) for guaranteeing the advances granted by banks and other Credit Institutions to small scale industries. The Reserve Bank of India operated the scheme up to March 31, 1981.
The Reserve Bank of India also promoted a public limited company on January 14, 1971, named the Credit Guarantee Corporation of India Ltd. (CGCI). The main thrust of the Credit Guarantee Schemes, introduced by the Credit Guarantee Corporation of India Ltd., was aimed at encouraging the commercial banks to cater to the credit needs of the hitherto neglected sectors, particularly the weaker sections of the society engaged in non-industrial activities, by providing guarantee cover to the loans and advances granted by the credit institutions to small and needy borrowers covered under the priority sector.
With a view to integrating the functions of deposit insurance and credit guarantee, the above two organizations (DIC & CGCI) were merged and the present Deposit Insurance and Credit Guarantee Corporation (DICGC) came into existence on July 15, 1978. Consequently, the title of Deposit Insurance Act, 1961 was changed to ‘The Deposit Insurance and Credit Guarantee Corporation Act, 1961 ‘.
Effective from April 1, 1981, the Corporation extended its guarantee support to credit granted to small scale industries also, after the cancellation of the Government of India’s credit guarantee scheme. With effect from April 1, 1989, guarantee cover was extended to the entire priority sector advances, as per the definition of the Reserve Bank of India. However, effective from April 1, 1995, all housing loans have been excluded from the purview of guarantee cover by the Corporation.