Will govt's move to reform deposit insurance scheme boost public confidence in banking?

In its bid to protect depositors of troubled banks, Union Cabinet on Wednesday cleared amendments in the Deposit Insurance Credit Guarantee Corporation (DICGC) Act-1961. The move, which was announced by the Finance Minister Nirmala Sitharaman in Budget speech on February 01, will help the government protect 98.3 per cent of bank accounts. The Bill was likely to be presented on the floor of Parliament during the ongoing Monsoon session.

It assumes significance in the wake of the problems faced by the depositors in case of stressed banks like the Punjab and Maharashtra Co-operative (PMC) Bank or Yes Bank and even Lakshmi Vilas Bank. The increased insurance cover on bank deposits came after 1993, when it was raised from Rs 30,000 after the Security Scam in 1992 had led to the liquidation of Bank of Karad in Maharashtra.

It could become possible for the Government by clearing the DICGC Bill-2021. The proposed legislation provides insurance to all bank deposits and covers all commercial banks, including foreign banks. Under the legislation, bank deposits up to Rs 5 lakh will be insured in each bank (inclusive of both principal as well as interest). However, it will not apply retrospectively.

Not to mention that DICGC is a subsidiary of the Reserve Bank of India (RBI) and provides insurance cover on bank deposits. Deposit insurance plays an important role in maintaining the stability of the financial system by assuring the protection of small depositors thereby ensuring public confidence in the financial system.

Normally, it takes around eight to 10 years after complete liquidation to get money under insurance. But now, even if there is a moratorium, within 90 days, the process will definitely be completed, giving relief to depositors.

Only 80 per cent of all deposit accounts globally get covered under similar deposit insurance schemes, while only 20-30 per cent of the deposit value gets covered.

The Corporation has processed claims amounting to Rs 993 crore during 2020-21 with a view to ensuring payment to insured depositors of liquidated banks under the prevailing pandemic situation. Of this, the Corporation has settled claims amounting to Rs 564 crore in respect of nine co-operative banks during 2020-21. An amount of Rs 330 crore has been settled in case of one cooperative bank in April. However, the net outgo of funds towards settlement of claims from the Corporation was also lower as there was a recovery of Rs568 crore during the year. There was an amalgamation of a private-sector bank and a foreign bank during the year.

Now, there is a cent of advice for the government. In India, several committees, have recommended RBP or risk-based premium. The Committee on Credit Risk Model (2006) constituted by the DICGC and the Committee on Differential Premium Systems (2015) also recommended RBP, but could not operationalise it as the roll out was linked with hike in deposit insurance cover. Govt must look into it.