The Centre's proposed Financial Resolution and Deposit Insurance Bill (FRDI), which is aimed at plugging bankruptcies in the financial services sector, includes a special provision which by definition allows the affected banks to use depositors' money to absorb some of the losses. The provision, which finds its origins in the European banking crisis of 2008-09, has raised a red flag after which the Centre hinted at reviewing the proposal. The proposal is part of the FRDI, which has now been referred to the Parliamentary committee that plans to establish a resolution corporation to monitor financial firms, anticipate the risk of their failure, take corrective action, and work out a resolution plan. The recent incident of restriction by the Reserve Bank of India (RBI) on the withdrawal of money kept with a failing bank has raised several questions for the common man. “Is my money safe with banks?, “Why is my money blocked?, “Is keeping money in bank in savings / deposit account akin to lending to a bank? “Why is my deposit amount not fully covered by insurance?”, are some of the queries that keep rising.Banks, including regional rural banks, local area banks, foreign banks with branches in India, and cooperative banks, are mandated to take deposit insurance cover with the Deposit Insurance and Credit Guarantee Corporation (DICGC) constituted by a Central Act and governed by the RBI. The DICGC has been in existence since 1978 to serve as deposit insurance and credit guarantee for banks in India.
A Guide to the deposit insurance and credit guarantee corporation (DICGC)
Q1 Which banks are insured by the DICGC?
Commercial Banks: All commercial banks including branches of foreign banks functioning in India, local area banks and regional rural banks are insured by the DICGC.
Cooperative Banks: All State, Central and Primary cooperative banks, also called urban cooperative banks, functioning in States / Union Territories which have amended the local Cooperative Societies Act empowering the Reserve Bank of India (RBI) to order the Registrar of Cooperative Societies of the State / Union Territory to wind up a cooperative bank or to supersede its committee of management and requiring the Registrar not to take any action regarding winding up, amalgamation or reconstruction of a co-operative bank without prior sanction in writing from the Reserve Bank are covered under the Deposit Insurance System. At present all co-operative banks other than those from the States of Meghalaya, and the Union Territories of Chandigarh, Lakshadweep and Dadra and Nagar Haveli are covered under the deposit insurance system of DICGC.
Primary cooperative societies are not insured by the DICGC.
Q 2 What does the DICGC insure?
In the event of a bank failure, DICGC protects bank deposits that are payable in India.
The DICGC insures all deposits such as savings, fixed, current, recurring, etc. except the following types of deposits.
(i) Deposits of foreign Governments;
(ii) Deposits of Central/State Governments;
(iii)Inter-bank deposits;
(iv) Deposits of the State Land Development Banks with the State co-operative bank;
(v) Any amount due on account of any deposit received outside India
(vi) Any amount, which has been specifically exempted by the corporation with the previous approval of Reserve Bank of India.
Q 3 What is the maximum deposit amount insured by the DICGC?
Each depositor in a bank is insured upto a maximum of Rs.1,00,000 (Rupees One Lakh) for both principal and interest amount held by him in the same capacity and same right as on the date of liquidation/cancellation of bank's licence or the date on which the scheme of amalgamation/merger/reconstruction comes into force.
Q 4 How will I know whether my bank is insured by the DICGC or not?
The DICGC while registering the banks as insured banks furnishes them with printed leaflets for display giving information relating to the protection afforded by the Corporation to the depositors of the insured banks. In case of doubt, depositor should make specific enquiry from the branch official in this regard.
Q 5 How is the premium paid by banks calculated?
All registered insured banks are liable to pay to the DICGC deposit insurance premium at the rate of 10 paise per annum for every deposit of Rs 100 (i.e 0.10 percent p.a) for the half year ending March and September on the total deposits of the bank as on the preceding half year. The premium paid by the insured banks are computed on the basis of their assessable deposits.
Q 6 What is the ceiling on amount of Insured deposits kept by one person in different branches of a bank?
The deposits kept in different branches of a bank are aggregated for the purpose of insurance cover and a maximum amount upto Rupees one lakh is paid.
Banks pay insurance premium on the total value of the deposits held by the bank. However, the insurance cover is restricted to Rs 1 lakh value of the deposit only. Why should there be a restriction on the deposit insurance claims as it appears that the full amount of deposits are insured? Further, for illustrative purposes only, when compared with life insurance cover, it appears that the premium paid for a term life policy of insurance cover of Rs 1 crore is approximately Rs 5,880 while the deposit insurance premium paid by the bank to the DICGC for a deposit of Rs 1 crore is Rs 10,000.
In the past two decades, commercial banks have paid 13 times the premium charged to cooperative banks, data from the DICGC shows. In this period, no commercial bank has been allowed to wind up operations, while the cumulative claims settled for cooperative banks have risen from Rs. 72 crores to Rs. 4,822 crores. The burden of bad behavior on the part of cooperative banks is being borne by the good banks, the state-backed banks, and ultimately by the taxpayer.
Now, The Govt. is rethinking of increase the insurance cover of ₹1 lakh on deposits. India is one of the few large economies around the world that has a uniform insurance premium for deposits across banks. At a deposit insurance cover of ₹1 lakh, India’s cover also appears relatively low.
(Source:The Economics Times, Financial Express and Livemint)
There are many banks in our country from public to private and some are in process to get banking licence. So think before deposit and follow RBI's guidelines. It is still in everybody mind, "Who is responsible for bank failure and why I pay instead of punish? These are my hard earn money and on that my financial life or my livelihood depends. Also Govt wants cashless India.Then how can I trust banks? On that part, I get only ₹1 Lakh over my deposits more than this. So at least Govt. should increase the insured payable amount from ₹1 lakh to ₹2 lakh." The conclusion part is depositors money may safe in financially strong banks with managing NPA also where govt is involved.
2020-2021 Budget: Govt announced increasing of insured amount from 1 Lakh to 5 Lakh. It is great news for all bank customer.
