Bank Deposit Insurance Raised Five Times to Rs5 Lakh But From Where the Money Will Come?
Finance minister (FM) Nirmala Sitharaman on Saturday increased the bank deposit guarantee limit to Rs5 lakh from Rs1 lakh. However, there is no clarity on who will pay for the increase in premium for the five times higher risk coverage. 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.
(https://www.moneylife.in/article/pmc-bank-higher-deposit-insurance-will-only-be-at-our-cost-while-regulators-remain-unaccountable/58281.html). Even the All Indian Bank Depositors Association (AIBEA) calls the move to increase deposit insurance five times as unwarranted.
The Deposit Insurance and Credit Guarantee Corporation (DICGC), which provides bank deposit insurance to its members insists that premium must be paid by banks from their own funds and not by depositors.
However, 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.
In a statement, CH Venkatachalam, general secretary of AIBEA says, “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, India’s largest bank unions, has also been demanding that public sector banks (PSBs) should not be asked to contribute to deposit insurance, since they are covered by a sovereign guarantee.
What would have prompted the government to increase the deposit insurance five times could be the recent scam in Punjab & Maharashtra Co-operative (PMC) Bank and its eventual closure, where thousands of depositors lost their money. The government and the Reserve Bank of India (RBI) continue to face severe criticism over capping the insurance at Rs1 lakh over the past few months.
As per the guidelines of RBI, deposits with all commercial banks and cooperative banks are insured under the DICGC. As per the DICGC norms each depositor in a bank was insured up to Rs1 lakh for both the principal and interest amount on deposits held in a particular bank. Even if the total of all the deposits held by an individual in a bank is more than Rs1 lakh, then the depositor will be able to get only Rs1 lakh including both principal and interest amount if the bank goes bankrupt.
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.
DICGC has been almost entirely settling dues of cooperative banks. Most cooperative banks are not only under dual regulation (RBI and the Registrar of Cooperatives), but are regularly controlled and exploited by politicians.
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. In 2018-19, DICGC collected a premium on Rs120 lakh crore of deposits, although only 28% of them (Rs33.70 lakh crore) were insured.
At Moneylife, our primary concern is, indeed, the safety of savings of common man. That will happen if there is regulatory accountability and strict supervision of all intermediaries that are entrusted with a fiduciary responsibility to protect depositors’ money.
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