Why only 51% of bank deposits are insured under DICGC: Eco Survey
According to the Economic Survey 2021-22, the deposit insurance cover given under the DICGC scheme does not cover 49.1% of total deposits held with Indian banks. It is preferable to partition deposits and books into distinct rights and capacities in order to benefit from greater insurance coverage.
Without the DICGC (Deposit Insurance and Credit Guarantee Corporation) insurance cover, the deposits are worth Rs 73.5 lakh crore in absolute terms. over half of all bank deposits are not covered by the DICGC. However, 98.1 percent of accounts are covered in terms of number.
“In terms of amount, the total insured deposits (Rs 76.2 lakh crore) as at end-March 2021 constituted 50.9 per cent (up from about 30 per cent under Rs 1 lakh cover) of the total assessable deposits (Rs 149.7 lakh crore) as against the international benchmark of 20-30 per cent,” stated the Economic Survey 2021-22.
In his address to the nation on 26 July 2019, Former Finance Minister Arun Jaitley had said that the RBI had decided to provide a credit cover of 100 per cent to all the domestic savings of up to ₹1 crore.
However, the DICGC scheme has also led to the creation of an extra layer of banking and regulatory compliance, while the additional cost has not yet been quantified.
DICGC is not just a financial insurance scheme but also brings a set of governance and reporting obligations on the Indian banks and their deposit taking affiliates.
It would be more effective if it were structured with separate accounts of banks, as suggested by the Central government in its policy paper. It is imperative that the implementation of DICGC is brought out in a way that does not disrupt or compromise the efficiency of the banking system.
While this is a huge task, the RBI could try to streamline the scheme so that it is easily understood by the customers.
While the government’s proposal of 100 per cent credit guarantee for deposits up to ₹1 crore is a welcome move, the RBI’s plan for providing 100 per cent DICGC coverage could be in the form of three-month deposits, which should have been part of its previous announcement. This makes sense, given that this scheme would protect depositors from losses up to only ₹25,000.
As mentioned by the finance minister in his press release, the RBI is working on providing a higher DICGC coverage to over 50 per cent of total deposits. However, in the process of providing this, a lot of banks have reported a rise in operating costs that need to be addressed.
While this was mentioned in the policy paper, the lack of more clarity on DICGC and on the costs being incurred to provide the same is a cause for concern
According to the Economic Survey, the RBI has found the DICGC scheme to be ‘an effective way of providing deposit insurance coverage to all depositors in India.’
Therefore, instead of being seen as a failed experiment in the long-run, it can be viewed as a positive step in ensuring the safety of deposits for all depositors, both corporate and individuals. This implies that instead of providing only Rs 50,000 of coverage per depositor (or the 50% floor for corporate), the entire corpus of deposits could be insured.
This could be done either through expansion of the coverage (perhaps for Rs. 2.2 lakh), or by making the provision more generous. In either case, there is no need to have a separate category of depositors for whom a separate ceiling needs to be set.
When the Insurance Act was introduced in 1961, there were no banking deposits in India. So, the insurance system was introduced very gradually over the years. By 1980, it was felt necessary to raise the limit of Rs. 2 lakh and for individual depositors.
In this regard, the Insurance Act of 1981 (IIA) and the Banking Regulation Act of 1982 (IBI) were both enacted to make this happen. The Insurance Act of 1981 was designed to cover ‘all deposits in any institution, whether by way of time deposits or current accounts The Insurance Act of 1981 allowed the Reserve Bank of India to decide the amount of coverage that should be provided to depositors (Section 17).
In the event of a bank going bankrupt, the RBI would be authorized to pay a claim out of the corpus of the depositor’s account, up to the limit decided by it (Section 18).
The Insurance Act was further amended in 1982 to include the new scheme for individual depositors. Here, the insurance coverage given was of Rs. 50,000.
It was made available to all depositors in India. In both these instances, the decision on coverage of the depositor was entirely left to the RBI. This did not happen for corporates or non-banking financial institutions (NBFSs).
Over the next ten years, the decision regarding deposit insurance coverage was taken by the RBI. This took the form of the three series of amendments to the RBI Act in 1987, 1992 and 1997. The Insurance Act was amended in 1987 to include section 11A.
Section 11A of the Act gave the RBI a more liberal power to decide the limit of coverage to be provided to depositors, which the RBI believed to be not high enough.
The Insurance Act was further amended in 1992 to include the scheme for corporates, known as the Deposit Insurance and Credit Guarantee Corporation, a completely different insurance scheme than the one provided to individual depositors.
The RBI Act was then amended in 1997, in the wake of the crisis in NBFSs. Here, the RBI Act was amended to include section 10A, 10B, 10C and 10D. Among other things, it increased the coverage limit to Rs. 10 lakh for the banking corporations.
In particular, section 10A(1)(b) provided that ‘if any bank fails, the insured deposit in the bank shall be deemed to have the prescribed limit of the Bank’. Section 10A(1)(a) permitted the RBI to decide the limit of coverage that should be provided to depositors (Section 10A(1)(a)).
The Act then clarified that section 10A and 10B were to be read together and ‘in the case of an insured account with more than one bank or an insured account maintained by a depositor with two or more banks, the limits of insurance under this Act shall be the aggregate of the limits of insurance for such account provided for under sub-section (1)(a) of section 10A’.
It further provided that ‘the Corporation shall be entitled to receive from the Bank, without any charge.The section 10C and 10D amendments gave the RBI more powers to take whatever steps it wanted to.
The coverage given by the RBI to deposits up to Rs. 2 lakh is a very low figure, even though it is far better than none. Further, if we examine the DICGC coverage, we find that for the individual category of depositors, Rs. 50,000 is provided (in addition to the Rs. 10,000 for the Banking Corporations provided for by Section 10A).
For individuals up to Rs. 2 lakh, the limit of insurance is Rs. 100,000. For individuals above Rs. 2 lakh, the limit is now Rs. 50,000. At least, individuals with deposits above Rs. 2 lakh can have more insurance coverage.
There is an urgent need to examine this aspect of the DICGC coverage, and to look into the reason for the very low coverage that is currently provided. Based on the Economic Survey, the RBI has found the DICGC scheme to be ‘an effective way of providing deposit insurance coverage to all depositors in India.’
So, instead of being seen as a failed experiment in the long-run, it can be viewed as a positive step in ensuring the safety of deposits for all depositors, both corporates and individuals.
This implies that instead of providing only Rs. 50,000 of coverage per depositor (or the 50% floor for corporates), the entire corpus of deposits could be insured.
This could be done either through expansion of the coverage (perhaps for Rs. 2.2 lakh), or by making the provision more generous. In either case, there is no need to have a separate category of depositors for whom a separate ceiling needs to be set.
With regard to corporates, the coverage may be provided by making it available to all corporates and not just to ‘banking corporations’.
It is possible that it is not the limit of coverage that needs to be raised, but rather the limit of insurance that needs to be raised. Instead of Rs. 2 lakh, it should be increased to perhaps Rs. 5 lakh or even higher.
At present all co-operative banks are covered by the DICGC. Primary cooperative societies are not insured by the DICGC However, they are included in the NCBS scheme. The National Insurance Commissioner also manages the general insurance sector of the country.
He covers general insurance companies, commercial and industrial insurance companies, fire insurance companies and health insurance companies. The National Insurance Commissioner is appointed by the Ministry of Finance.
The Insurance Commissioner manages his office from Shahnawaz Manzil in New Delhi.
In November last year, the RBI ordered five lenders to re-structure their credit business by the end of this month or close down. The banks, which were given until February to resolve their issues, are – Dena Bank Ltd, Indian Bank Ltd, Punjab National Bank Ltd, United Bank of India Ltd and Vijaya Bank Ltd.
In this regard, we request the Government to take immediate steps to improve the safety and adequacy of deposits in the Indian financial sector. The RBI could consider doing a similar study in the future when adequate data becomes available. The economic survey reveals that the deposit insurance cover given under the DICGC scheme does not cover 49.1% of total deposits held with Indian banks. This finding needs to be examined and discussed, and more clarity is necessary.
Edited and published by Ashlyn Joy
