Bank Deposit Insurance: DICGC To Increase Premium by 20% from 1st April
While some bank depositors were feeling happy about increase in deposit insurance to Rs5 lakh from Rs1 lakh, the Deposit Insurance and Credit Guarantee Corporation (DICGC) has announced a 20% increase in its premium on deposit insurance. Given the five times increase in insurance cover on deposits, the increase in premium is insignificant; banks have been told to pay the premium themselves.
 
The DICGC requires that banks should not recover the premium from depositors and one assumes this will continue even if there is a major bank failure in the future. Remember, DICGC collects insurance premium on overall deposits in banks, but provides cover only for assessable deposits of up to Rs5 lakh (up from Rs1 lakh until recently).  
 
DICGC, in a circular (DICGC.RPIC.No.2676/02.01.003/2019-20 dtd 5 February 2020) sent to chiefs of all banks, says, "The premium will be raised to 12 paise per Rs100 of assessable deposits per annum from the half year beginning 1 April 2020 onwards...it is imperative to maintain the adequate level of deposit insurance fund by the DICGC, for settlement of claims in case of failure of banks."
 
 
As per DICGC, the deposit insurance premium on assessable deposits of Rs100 was 10 paise since April 2005. In 2018-19, DICGC collected a premium on Rs120 lakh crore of deposits, although only 28% of them (Rs33.70 lakh crore) were insured.
 
As on 31 March 2019, the deposit insurance fund at DICGC is Rs97,350 crore, including a surplus of Rs87,890 crore. The claims settled by DICGC so far since 1962 are only Rs5,120 crore and that too for the cooperative banks.
 
Out of 2,098 banks covered by the DICGC, 1,941 banks are cooperative banks. Only these banks are facing problems of closure and liquidation and the deposits of these banks need to be covered by DICGC. 
 
In FY18-19, commercial banks, including public sector banks (PSBs), paid a deposit insurance of Rs11,190 crore while cooperative banks paid Rs850 crore, taking the total premium paid to DICGC at Rs12,040 crore. During the same year, DICGC received claims worth Rs37 crore from cooperative banks. However, none of the claims was settled.
 
While there was no clarity on who will pay for the increase in premium for the five times higher risk coverage, another circular issued by DICGC says, the banks will pay the premium. "The rate of premium payable by the insured banks will be raised from 10 paise per Rs100 of assessable deposits to 12 paise per Rs100 assessable deposits per annum."
 
 
Over the past 25 years, only one private lender, Global Trust Bank (GTB) has failed. At the same time, cooperative banks fail regularly. The flawed deposit insurance guarantee scheme is viable only because of the hefty premium collected from PSBs and successful private banks.
 
DICGC has been almost entirely settling dues of cooperative banks. Most cooperative banks are not only under dual regulation (Reserve Bank of India and the Registrar of Cooperatives), but are regularly controlled and exploited by politicians. 
 
Moneylife and Moneylife Foundation, which work for financial literacy, have strongly opposed any increase in deposit insurance and subsequently the premium, because it will only mean that regulators and policy-makers who are responsible for regulation and supervision are let off the hook.
 
Even the All Indian Bank Depositors Association (AIBEA) had called the move to increase deposit insurance five times as unwarranted. 
 
In a statement, CH Venkatachalam, general secretary of AIBEA had said, “Already, under the provisions of the Banking Regulations Act, the deposits of our banks enjoy the guarantee and no bank can be closed down. By increasing the insurance cover, the cost will go up for banks, which in turn will be put on the shoulders of the banking public through hike in service charges. Increase in insurance cover on bank deposits is warranted only for urban cooperative banks, which are vulnerable. The government should withdraw this proposal.”
 
AIBEA says the aggregate deposits of PSBs are Rs72 lakh crore, of which only Rs22 lakh crore are covered by insurance, but premium is collected on the entire amount. 
 
"While the entire amount of deposit is taken as assessable deposit and premium is collected on the total deposits, the scheme covers insurance only up to Rs1 lakh. Thus Banks are paying premium even for the deposits which are not insured. For example, premium paid for FY2018-19 was on deposits worth Rs120 lakh crore but deposits covered by insurance were only for Rs33.70 lakh crore or just 28% of the total deposits," the bank employee union says.
 
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    PMC Bank scam: SC stays HC order on sale of HDIL assets
    The Supreme Court on Friday stayed the Bombay High Court order on the sale of the bankrupt Housing Development and Infrastructure Ltd (HDIL) as a measure to facilitate the repayment of dues of crisis-hit Punjab and Maharashtra Cooperative (PMC) Bank.
     
    The Reserve Bank of India moved the top court in an appeal challenging the Bombay High Court order.
     
    A bench headed by Chief Justice S.A. Bobe and comprising justices B.R. Gavai and Surya Kant took note of this appeal and issued notice on RBI's plea to parties concerned, including Sarosh Damania, who had moved the Bombay High Court seeking a resolution ensuring payment of dues to the account holders in PMC Bank.
     
    According to the RBI, the PMC Bank manipulated its core banking system to shield nearly 44 problematic loan accounts, which includes HDIL. Limited staff members had access to these accounts. Enforcement Directorate (ED) and the Economic Offences Wing of the Mumbai police have registered offences against HDIL promoters and senior bank officials.
     
    The Bombay High Court had constituted a three-member committee for evaluating and then formalize sale of encumbered assets of HDIL. The High Court, through this channel, was expected to expeditiously recover dues, which were payable by the firm to PMC Bank.
     
    In September 2019, the RBI discovered the PMC Bank had allegedly created fictitious accounts to mask loans to the tune of Rs 4,355 crore approved for HDIL.
     
    A PIL was filed in the High Court urging the court to pass directions for expeditious disposal of HDIL assets and properties, which were attached by various investigating agencies. The PIL contended the disposal of these assets would help in repaying PMC Bank depositors at the earliest.
     
    Last month the Supreme Court had also stayed a Bombay High Court order connected with the shifting of the two main accused of the Punjab & Maharasthra Cooperative (PMC) bank scam, from Arthur Road jail to their residence to enable them to sell their assets.
     
    The Enforcement Directorate rushed to the apex court challenging the relief granted to PMC bank scam accused and HDIL directors.
     
    The Bombay High Court had ordered setting up of a three-member committee to conduct valuation and sale of encumbered assets of HDIL to recover the dues, which the firm is supposed to pay to the crisis-hit PMC Bank.
     
    The High Court allowed the HDIL's father-son duo, Rakesh and Sarang Wadhawan, to shift to their house from jail under supervision of two jail guards and to ensure their cooperation with the investigating agencies.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    COMMENTS

    suneel

    2 weeks ago

    I am surprized not to see RBI's concern. Why RBI approached supreme court for a stay.





    REPLY

    RAKESH KUMAR

    In Reply to suneel 2 weeks ago

    Yes, story is not complete. Headline ralks about stay but reason is never mentioned in detail.

    SBI slashes MCLR by 5 bps across tenors
    In its ninth consecutive cut in MCLR by a bank in the current fiscal, India's top lender State Bank of India (SBI) on Friday aannounced a cut in the retail fixed deposits or FD rates effective from February 10.
     
    The reduction in MCLR by the bank comes a day after the RBI left the repo rates unchanged at 5.15 per cent, but its long-term repo operation for up to Rs 1 lakh crore made the cost of funds cheaper for banks.
     
    Marginal Cost of Funds-based Lending Rate (MCLR) is the minimum lending rate below which a bank is not permitted to lend. 
     
    "In view of the surplus liquidity in the system, the SBI realigns its interest rate on Retail Term Deposits (less than Rs 2 crore) and Bulk Term Deposits (Rs 2 crore & above) from February 10, 2020. The bank slashed the Term Deposits rates by 10-50 bps in the Retail segment and 25-50 bps in the Bulk segment," a SBI statement said.
     
    The bank has cut the FD rates across all tenors, except for those with maturity period between 7 to 45 days.
     
    For FDs maturing within 46 to 179 days, the SBI has cut the interest rate sharply by 50 basis points (bps). Now, these deposits will fetch an interest rate of 5 per cent. 
     
    For FDs maturing within 180 to 210 days and 211 days to less than 1 year, the SBI will give an interest rate of 5.50 per cent.
     
    Earlier, the SBI was offering 5.80 per cent on these deposits. 
     
    The bank has slashed the interest rate by 10 bps on deposits maturing in one year to 10 years. These deposits, which earlier fetched 6.10 per cent interest, will now be offered at 6 per cent interest.
     
    After the latest rate cut by the SBI for senior citizens, deposits maturing in 46 to 179 days will fetch 5.50 per cent returns. 
     
    For FDs maturing in 180 to 210 days as well as 211 days to less than one year, the SBI will offer an interest rate of 6 per cent. After the latest revision, the SBI will give 6.50 per cent interest to senior citizens for maturity periods between one year and 10 years.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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