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.
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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