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 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.
 
(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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    COMMENTS

    Newme

    4 months ago

    I have seen how co-operative banks and societies operate in Tamilnadu. Local Ruling party politicians capture the office positions. Loans are given to local powerful people and are rarely repaid. Gold loans are a fraud because fake golds are mortgaged. Most of them survive by new deposits sort of MLM scheme and by doles from State government for political reasons. Why should their deposits be guaranteed?

    Meenal Mamdani

    4 months ago

    I don't understand why cooperative banks are regulated any differently from public sector or private banks.
    May be at one time when the banking industry was young, this was necessary to encourage banks to form and provide service to the public.
    Is this needed any more?

    REPLY

    Balakrishnan Srinivasan

    In Reply to Meenal Mamdani 4 months ago

    Cooperative banks have to comply with both the BR Act as well as the Cooperative Societies Act. While administrative control is with the State Government, Inspection and monitoring is with the RBI. Cooperative Banks are local banks to care for the financial needs of their members. Their share capital is contributed by its members and in case of distress there is no recapitalisation from Government. What is needed is professional management, publication of quarterly results and proper inspection which can identify the problems at the initial stage itself. Shortly, Cooperative Banks are nobody's child.

    Dr. Rakesh Goyal

    4 months ago

    Let every bank decide to insure the customer deposits or not. Let banks compete for deposits from customers based on this assurance of insurance.

    38-40% of deposits is always with RBI or in Govt securities in form of CRR/SLR. Only 60% of deposits is exposed as this can become NPA due to various reasons including PMCisation, PNBisation (Nirav Modi etc) and big exposure to declining industries, etc.

    Currently, RBI and govt is flushed with DICGC funds and nobody knows, how it is utilized. May be in any future budget, govt may monitize and privitize DICGC, as peoposed for LIC.

    Ramesh Poapt

    4 months ago

    wait for the right answer of the question .

    No recapitalisation for public sector banks in FY21: FM
    Finance Minister Nirmala SItharaman on Saturday said the government has infused Rs 3.5 lakh crore in the PSU banks and now banks will go to market to raise funds on their own, ruling out any recapitalisation.
     
    "Financial inclusion is the key. A clean, reliable and robust financial sector is critical for robust economy", she said. 
     
    "We have infused Rs 3.5 crore capital into PSU banks. A few among them will be encouraged to move capital market for fundraising purposes", she said in her Budget Speech.
     
    In the previous Budget, the government had infused Rs 70,000 crore.
     
    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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    RBI Imposes Rs50 Lakh Penalty on Dombivli Nagari Sahakari Bank
    The Reserve Bank of India (RBI) has imposed a monetary penalty of Rs50 lakh on Dombivli Nagari Sahakari Bank Ltd (DNS Bbank) for non-compliance with directions issued on income recognition and asset classification (IRAC) norms. This action is based on deficiencies by DNS Bank in regulatory compliance only, the central bank clarified.
     
    In a release, RBI says, "The statutory inspection of the DNS Bank with reference to its financial position as on 31 March 2018, conducted by RBI, revealed, non-compliance with RBI directions on IRAC norms. A notice was issued to the bank advising it to show cause as to why monetary penalty should not be imposed for non-compliance with the aforesaid direction. After considering the bank’s reply, oral submissions made during the personal hearing and clarification provided after the personal hearing, RBI came to the conclusion that the charge regarding non-compliance with the direction on IRAC norms, warranted imposition of monetary penalty."
     
    "This action is based on deficiencies in regulatory compliance and is not intended to pronounce upon the validity of any transaction or agreement entered into by DNS Bank with its customers," RBI clarified.
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