The Union Cabinet of India recently approved the DICGC Bill, 2021. This legislative action has got everyone talking, especially considering the recent financial failures of banks like Punjab and Maharashtra Co-operative (PMC) Bank, Yes Bank, and Lakshmi Vilas Bank. These incidents have triggered a serious discussion about the low level of insurance against deposits held by customers in Indian banks.
Understanding Deposit Insurance and Credit Guarantee
At its core, deposit insurance serves as a protective cover against losses stemming from bank deposits if a particular bank experiences financial failure, leading to insolvency. On the other hand, credit guarantee provides a specific remedy to the creditor if the debtor fails to repay their debt.
Coverage Under the Bill
The newly passed bill is set to provide coverage to 98.3% of total depositors and account for 50.9% of deposit value within the banking system. Interestingly, these numbers are well-above the global level which averages at 80% coverage of depositors and 20-30% of deposit value. This Bill is applicable to all types of banks, including regional rural banks and co-operative banks. Even banks currently under moratorium or those that could potentially come under moratorium are covered.
The Concept of Insurance Cover and Moratorium
Under the recently passed bill, an account holder will be entitled to funds up to Rs 5 lakh within 90 days in case a bank comes under moratorium imposed by the Reserve Bank of India (RBI). The term “moratorium” refers to a legally sanctioned delay in fulfilling a legal obligation or paying a debt. The insurance cover of Rs. 5 lakh represents a substantial increase from the previous amount of Rs 1 lakh, a change implemented in 2020.
Insurance Premium & the Role of The Damodaran Committee
The bill allows for a 20% immediate hike in deposit insurance premiums, with an upper limit of a 50% increase. This premium is paid by the banks to the DICGC. The new provision is based on recommendations from the Damodaran Committee on ‘Customer Services in Banks’ in 2011. It proposed a five-time increase in the cap to Rs. 5 lakh considering the rise in income levels and growing size of individual bank deposits.
About the Deposit Insurance and Credit Guarantee Corporation
DICGC was established in 1978 following the merger of the Deposit Insurance Corporation (DIC) and Credit Guarantee Corporation of India Ltd. (CGCI). It was created by passing the DICGC Act, 1961 in Parliament. Today, DICGC functions as a deposit insurance and credit guarantee for banks in India and is governed by the RBI as its wholly owned subsidiary.
Deposit Insurance and Credit Guarantee Corporation Coverage
Banks including regional rural banks, local area banks, foreign banks operating branches in India, and cooperative banks are required to take deposit insurance cover with DICGC. All types of bank deposits such as savings, fixed, current, recurring, etc., are insured by DICGC.
Funds Maintained by Deposit Insurance and Credit Guarantee Corporation
The corporation maintains several funds, including the Deposit Insurance Fund, Credit Guarantee Fund, and General Fund – each funded by the respective insurance premiums and guarantee fees, and used for settlement of claims. Meanwhile, the General Fund is utilized for managing the establishment and administrative expenses of the corporation.
