Published On: August 27, 2021 19:58 IST
Introduction
Recently, Parliament has passed the Deposit Insurance and Credit Guarantee Corporation (Amendment) Bill, 2021 in Lok Sabha on dated August 9th, 2021[i]. As per Finance Minister of India Ms. Nirmala Sitharaman, the bill can prove to be a boon for the small depositors, including those of the Punjab and Maharashtra Corporation (PMC) Bank. Also, the bill was initially introduced in Rajya Sabha where it got passed. In both housed the bill has faced quite criticism.
Insurance Coverage is a commercial term that is generally used in commerce and businesses. It is generally defined as the amount of risk or liability that is covered for an individual or entity by the way of insurance by submitting the ascertained amount of premium monthly, quarterly, semi-quarterly or annually. It helps in protection from uncertain and unforeseen events in the future.
Deposit Insurance here generally refers to a measure used to protect the bank depositors, in full or in part, from any loss caused by a bank’s inability to pay its debts or collapse of any bank due to any reasons. In India DICGC i.e. Deposit Insurance and Credit Guarantee Corporation is responsible for insuring all bank deposits, such as savings, fixed, current and recurring deposits. This is generally done to save the interests of the customers.
What is Deposit Insurance and Credit Guarantee Corporation? Why was it established?
Deposit Insurance and Credit Guarantee Corporation generally termed as DICGC is a wholly owned subsidiary of the Reserve Bank of India (RBI) which was established in 1978. As discussed above, it is a government regulated body that is mainly responsible for protection cover for the deposit holders in a case when a bank is incapable of making payment to its depositors. It provides a certain amount to the depositors in the circumstances like bankruptcy of a bank.
How it works?
The DICGC as mentioned above generally protects the money kept in all commercial and foreign banks that are located in India; central, state and urban Co-operatives; regional rural banks and local banks, and the banks must have opted for DICGC cover. The rules and regulations are performed as per the Deposit Insurance and Credit Guarantee Corporation Act, 1961 and the Deposit Insurance and Credit Guarantee Corporation General Regulations, 1961, which were framed by RBI under sub-section (3) of Section 50 of the Act.
The DICGC is a body enacted by the directions of this Act, which came into existence in year 1978. Not only deposit Insurance, but the corporation also talks about Credit Guarantee which means the guarantee that provides for a specific remedy to the creditor if his debtor does not return the debt.
Types of Deposits Covered under DICGC:
DICGC insures all bank deposits such as saving, fixed, current etc. Apart from these, there are some exceptions when DICGC is not entitled to provide for the insurance, these are:
- Deposits of foreign Governments, Central/ State Governments, Inter Bank deposits.
- Deposits of the State Land Development Banks with State Co-operative banks, any amount due on account of any deposit received outside India, etc.
These types of deposits are not insured under DICGC specifically.
Which Funds are maintained by DICGC?
The Deposit Insurance and Credit Guarantee Corporation is entitled to maintain the following types of funds:
- Deposit Insurance Fund
- Credit Guarantee Fund
- General Fund
The Deposit Insurance Fund as well as Credit Guarantee Fund are funded by the premia and the guaranteed fees received on account of deposit Insurance of different banks and the Credit Guarantee. These are only reserved for the purposes of the insurance and to fulfill the claims and their settlements.
On the other hand, the General Fund as the name suggests is utilized only for general expenses like establishment, maintenance and administration expenses of the Corporation. In short, it is used for day-to-day expenses.
What are Key points brought by the Amendment Bill?
In the Monsoon Session of the Parliament, the DICGC Bill was passed by both houses of the Parliament. It mainly concerns the more safety of the depositors of different banks who have already opted for the regulations of the DICGC. To elaborate, it can be said that it is mainly done to create trust among the customers in their banks even the bank get collapsed due to bankruptcy.
Two major amendments were brought up under the Bill, 2021, which are as follows-
- Increase in Amount of Insurance of Deposits:
Initially, the deposits of up to Rs. one lakh was being insured by the government as per the regulations. But after the amendment the amount is heightened to Rs. Five lakhs. The step is taken to compensate the depositors in case of insolvency of banks. The banks have been paying 10 paise to the DICGC for every 100 rupees of deposits that they hold to avail deposit insurance for their customers. Now, the amount will be increased to 15 paise for every 100 rupees.
In short, it means that 98.3% of all bank accounts and 50.9% of all deposit value will be protected by the government.
- The Time limit to return money to the depositors has been ascertained to be 90 days:
After the new amendment, it became mandatory that the Deposit Insurance and Credit Guarantee Corporation (DICGC) must return the owed to the depositors within 90 days from when a bank collapses. Before the introduction of this amendment, there was no time bound implied in this process due to which it took several years to the depositors to their own money back which affects the depositors as well the their trust in banking system of the country. Generally, they had to wait till the liquidation or reconstructing of a distressed lender to get their deposits that are insured against default.
Hence, these were the two major amendments introduced in the DICGC Amendment Bill, 2021 and was passed in the Parliament.
What were the Circumstances leading to the Introduction of the Bill?
There is quote that “no changes are made without sufferings”, which has been seen in the whole history. Similarly, behind every amendment in Law, there is definitely some act or circumstances initiating the changes to be made. In the following Bill, the main situations leading to this step can be discussed as following:
- Damodaran Committee:
The Committee formed in 2011, headed by SEBI chairman M Damodaran, was set up by the Apex Bank to look into the issues of the customer services and to evaluate the existing system of grievance redressal mechanism prevalent in banks, its structure and efficiency of the system prevailing and working. The main aim of the committee was to investigate the bank-customer relationship.
One of the recommendations made by this particular committee was to increase the amount of insured deposits from Rs. 1 lakh to Rs. 5 lakh which has formed the base of the following amendment.
- Failure of PMC (Punjab-Maharashtra Corporative) Bank:
One of the major and immediate reasons of the introduction of this Amendment Bill was the failure of Punjab-Maharashtra Corporative Bank. The RBI has admitted to notice three major irregularities in the operations of multi-state Maharashtra and Punjab Co-operative Bank that necessitated immediate action under Section 35A of the RBI Act. The violations included financial irregularities, failures of internal control and systems under-reporting of its (lending) exposure. It led the RBI to go through the problems of the banking system as well as the depositors of the banks.
In this way, these were the reasons responsible for the initiation of the amendments to be brought up in Parliament.
What can be the Effects of this Amendment?
It should be noted that the following amendment has both good as well as bad effects which have to be analyzed properly[ii]. Increase in Deposit Insurance can help to boost the confidence of depositors in the banking system which can help to reduce the risk of a bank run which generally happens when a large number of depositors do not feel safe for their money from a bank at the same time. We can say that it is a cycle which is linked by trust of depositors in the banking system. More depositors leading to the increase in the working of banking system and lessen the rate of bankruptcy and vice- versa.
Moreover, it can increase the liquidity of the money in the economy which in turn would help in increased aggregate demand turning to increase in circulation of the money in the whole economy efficiently. This can give a kick to the economic activities and hence a chance to curb the phase of economic slowdown as well as stagnancy somehow.
At the same time, the critics argue that the step of increasing the Deposit Insurance can lead to moral hazard as when the depositors know that their deposits will be protected by the government, they have very little reason to conduct due diligence on the banks in which they actually deposited their money. Even some also argue that Deposit Insurance is a reason of failure of Bank in different countries. Also, some even questioned the working of DICGC admitting using uniform premiums with different banks which is said to be uncharacteristic in the economic ethics.
Conclusion
As per conclusion, we can say that if properly initiated the step can prove to be a great economic push and a savior of the Indian Banking system which was at its verge of collapse in the recent years. Many banks like PMC have been demolished due to various reasons which is a cause of people’s distrust in the Indian Banking System.
People’s trust is both a cause as well as effect of a good banking system and its working which are parallel in nature. But if the trust is made by the government, still it can prove to be a moral hazard and unethical to the banks themselves. Though in today’s era the practicality has overlapped morality, the step can prove to be a great success in the financial and economic matters of the nation. To reign the risk, regulators such as Reserve Bank of India may choose to regulate banks more aggressively.
To read the Bill:
[embeddoc url=”http://164.100.47.4/BillsTexts/RSBillTexts/PassedRajyaSabha/deposit%20rs%20pass-04082021-E.pdf”][i] “DICGC Bill,2021”, available at: drishtiias.com (Last visited on August 18th,2021)
[ii] Prashanth Permul, “How will deposit insurance help of a bank fails?” available at: thehindu.com (last visited on August 18th, 2021)