Depositors to get up to Rs 5 lakh within 90 days if bank under moratorium

Finance Minister Nirmala Sitharaman and Minister of Sports, Youth Affairs and Minister of Information and Broadcasting Anurag Thakur
The Union Cabinet has cleared the Deposit Insurance and Credit Guarantee Corporation (DICGC) Bill, 2021, which will allow depositors to withdraw up to Rs 5 lakh in 90 days.

The announcement will cover 98.3 per cent of all deposit accounts and 50.9 per cent of the deposit value, Finance Minister Nirmala Sitharaman said on Wednesday. This compares with the global deposit insurance coverage of 80 per cent of all accounts and 20-30 per cent of the deposit value.

“Even if there is a moratorium on a bank...this measure will set in,” Sitharaman said. In the first 45 days, after the bank is placed under moratorium by the Reserve Bank of India (RBI), the lender will collect all depositor claims and submit it to DICGC. The corporation will process the claims in real time. Within 90 days, the process will be completed, even when the bank resolution is ongoing.

“This will be the biggest relief we can offer to small depositors, nearly covering 98.3 per cent depositors,” Sitharaman said.

The DICGC Bill, 2021, will cover banks that have been already placed under moratorium, and will insure savings deposits, fixed deposits, current and recurring deposits.

Satish Marathe, director on the RBI board, said this would address the woes of depositors who were not able to get their funds due to problems of banks. Another likely fallout will be that the revival of banks facing problems will become difficult as they will have to return money to the depositors.

DICGC has paid most of the claims to customers of cooperative banks. There may be some burden on the corporation in the form of higher outgo, but it would not adversely impact financial profile, analysts said.

“Although the change will cover 98.3 per cent accounts, there is certainly scope for raising the limit further since the middle-income depositors may still not get full benefit in the case of a failure of a bank, and one may need to rely upon a merger with another bank as a bailout to take care of customers’ money,” said Jyoti Prakash Gadia, managing director, Resurgent India.

As the government had increased the deposit insurance cover for bank customers from Rs 1 lakh to Rs 5 lakh last year, lenders have been paying a premium of 12 paise per Rs 100 deposit since April 2020, as compared to 10 paise earlier. The law has a provision that the premium will not be hiked beyond 15 paise per Rs 100 deposit. There will be enabling provision to increase this cap in future, which will be determined by the government in consultation with the RBI.

At present, the amount in Deposit Insurance Fund (DIF), used for the settlement of claims of depositors of banks under liquidation, reconstruction and amalgamation, stood at Rs 1,10,380 crore as on March 31, 2020, as against Rs 93,750 crore as on March 31, 2019. The DIF is built out of the premium paid by insured banks and the coupon income received on investments in central government securities.

DICGC collects insurance premiums from the insured banks for administration of the deposit insurance system. The premiums to be paid by the insured banks are computed on the basis of their assessable deposits. The Insured banks pay advance insurance premiums to the corporation semi-annually within two months from the beginning of each financial half year, based on their deposits as at the end of previous half year.

The premiums paid by the insured banks to the Corporation are required to be borne by the banks themselves and are not passed on to the depositors.

For delay in payment of premium, the bank is liable to pay interest at the rate of 8 per cent above the Bank Rate on the default amount from the beginning of the relevant half-year till the date of payment.

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