April 19, 2024
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Syllabus– General Studies 3(economy)
Context
- Recent troubles for depositors in getting immediate access to their funds in banks such as Punjab & Maharashtra Co-operative (PMC) Bank, Yes Bank and Lakshmi Vilas Bank has put spotlight on the subject of deposit insurance.
- The Union Cabinet recently cleared changes to the deposit insurance laws to provide funds up to Rs 5 lakh to an account holder within 90 days in the event of a bank coming under the moratorium imposed by the RBI.
- Earlier, account holders had to wait for years till the liquidation or restructuring of a distressed lender to get their deposits that are insured against default.
The Union Cabinet has approved the Deposit Insurance and Credit Guarantee Corporation (Amendment) Bill, 2021 and has been introduced in Parliament’s monsoon session.
Bill provisions
- The cover of Rs 5 lakh per depositor is provided by the Deposit Insurance and Credit Guarantee Corporation (DICGC). It provides deposit insurance that works as a protection cover for bank deposit holders when the bank fails to pay its depositors.
- The Bill has proposed that even if a bank is temporarily unable to fulfil its obligations due to restrictions such as moratorium, depositors can access their deposits to the extent of the deposit insurance cover through interim payments by the Deposit Insurance and Credit Guarantee Corporation (DICGC). For this, the Bill seeks to insert a new Section in the DICGC Act, 1961.
- It also seeks to amend Section 15 of the DICGC Act to enable the Corporation to increase the ceiling on the amount of premium, with the prior approval of the Reserve Bank of India (RBI).
- Besides, it will also provide that the DICGC may defer or vary the receipt of repayments due to it from the insured bank and to empower the Corporation to charge penal interest in case of delay in repayment by the banks to the Corporation.
Who pays for insurance?
- Deposits in public and private sector banks, local area banks, small finance banks, regional rural banks, cooperative banks, Indian branches of foreign banks and payments banks are all insured by the DICGC.
- The premium for this insurance is paid by banks to the DICGC, and not be passed on to depositors. 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.
Benefit for account holders
- Depositors normally end up waiting for 8-10 years before they are able to access their deposits in a distressed bank only after its complete liquidation.
- With the changes being proposed to the law, now depositors will get insurance money within 90 days, without waiting for eventual liquidation of the distressed banks.
- This will cover banks already under moratorium and those that could come under moratorium.
- 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 closer to the 90th day.
- This will be beneficial to depositors of PMC Bank, under moratorium since September 2019, with depositors not being able to access funds beyond Rs 1 lakh.
Question- How Deposit Insurance and Credit Guarantee Corporation (Amendment) Bill, 2021 can help in securing depositors interests in case of bank failure?
The Indian Express article-
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