INSURANCE OF DEPOSITS
The issue of protecting the Deposits of Depositors of Banks and other Financial Institutions from the risk of non repayment of their Deposits due to Closure of the Banks/Institutions, which may be due to fraudulent transactions or misdeeds of the owners of the Banks/Institutions, has drawn a lot of attention of late. This is because there has been a spate of closures of Banks in the Private and Co-Operative Sectors.
The History of Banking in India shows that till the Nationalisation of Banks in 1969, there were only Private Banks set up by Individuals/organizations and the State Banks set up by the Princely States before the Independence of India.
There were of course many banks which went into liquidation. But there were also many Mergers and Take overs of Banks thus avoiding liquidations. After Bank Nationalisation probably there was no Commercial Bank, Private or State, which was allowed to go under liquidation.
In any closure or liquidation of Banks it is the Depositors who always lose either partially or fully their hard earned Savings.
In order to address this issue the Government of India formed what is called the
‘The Deposit Insurance and Credit Guarantee Corporation of India Ltd.,’
for the purpose of insurance of deposits and guaranteeing of credit facilities of Banks.
The salient Features of the DICGCI are:
Banks covered by Deposit Insurance Scheme
(I) All commercial banks including the branches of foreign banks functioning in India, Local Area Banks and Regional Rural Banks.
(II) All State, Central and Primary co-operative banks functioning in the States/Union Territories which have amended their Co-operative Societies Act as required under the DICGC Act, 1961,
DICGC insures all bank deposits, such as saving, fixed, current, recurring, etc
- 1,00,000/- with effect from 1st May 1993 onwards.
- 5,00,000/- with effect from 4th February 2020 onwards
The Corporation has revised the premium further to 12 paise per 100 of assessable deposits per annum from the half year beginning April 1, 2020 onwards with the objective of maintaining a strong DIF.
The premium paid by the insured banks to the Corporation is required to be absorbed by the banks themselves. In other words the financial burden on account of payment of premium should be borne by the banks themselves and should not be passed on to the depositors.
Settlement of claims
- In the event of the winding up or liquidation of an insured bank, every depositor of the bank is entitled to payment of an amount equal to his deposits held by him in the same right and in the same capacity in all the branches of that bank put together, standing as on the date of cancellation of registration (i.e. the date of cancellation of licence or order for winding up or for liquidation) subject to the set off of his dues to the bank, if any, subject to the limit of the insurance coverage fixed from time to time.
- The DICGC makes the payment of the eligible amount to the liquidator/chief executive officer of the transferee / insured bank, for disbursement to the depositors. No payment is made directly to the depositors.
The Corporation maintains the following Funds :
- Deposit Insurance Fund
- Credit Guarantee Fund
- General Fund
- The surplus balances in all the three Funds are invested in Central Government Securities which is the only investment permissible under the Deposit Insurance and Credit Guarantee Corporation Act, 1961 and the income derived out of such investments is credited to the respective Funds.
(Source: website of DICGCI)
- It can be seen from the above that the value of the deposits protected was only Rs.1,00,000/- for a long time and has been enhanced to Rs.5,00,000/- only from the year 2020.
- This means that if a person has more than Rs.5,00,000/- of deposits in any Bank he will be protected only to the extent of Rs.5,00,000/-.
- It also means that a person with investible funds of more than Rs.5 lakhs should keep deposits in multiple Banks (not Branches) of not more than Rs.5lakhs each. For example if a person has Rs.25 lakhs than he should deposit in 5 or 6 Banks.
- This adds to the burden of the Depositor of monitoring the receipt of Interest Payments from so many banks, renewals, closures, etc.
- Consider the following Statistics:
Total Bank Deposits: March 1996 March 2019
Rs.4,33,819 crores Rs.1,62,68,405 crores
(Source: RBI website. 1996 is the earliest year for which data is available)
That is since 1993, for the past more than 25 years, the total deposits in the Banking system have grown by nearly 40 times.
- The premium paid by the Banks to the DICGCI also would have similarly grown even though in earlier years the premium was less.
- The amount of deposits held individually by the depositors would also have grown substantially.
- In the light of the above the increase in Insurance cover from Rs.1 lakh to merely Rs.5 lakhs is totally inadequate and unjustified.
_ Statistics are not available in the public domain pertaining to DICGCI regarding
Total amount of premium collected so far
Total amount of claims settled so far to a) Commercial Banks and
b) Co-operative Banks
Total amount of the Corpus Funds as on date
-As a body blow to the beleaguered depositors The GOI has introduced a Bill in Parliament called “Financial Resolution and Deposit Insurance Bill 2017” which is still under consideration and not become an Act.
-One of the controversial provisions of this Bill is what is called the ‘BAIL-IN’ clause.
-Under bail-in, the Resolution Corporation can internally restructure the firm’s debt by: (i) cancelling liabilities that the firm owes to its creditors, or (ii) converting its liabilities into any other instrument (e.g., converting debt into equity), among others
-Which literally means that a Bank under Restructuring or Liquidation can wash its hands off its liability to pay the Depositors (Bank Deposits are Liabilities in the Balance Sheet of a Bank).
-From whatever little information that is available it appears that the maximum claim on DICGCI was because of the failures of Co-operative Banks.
(This issue of Co-Operative Banks and their functioning is by itself a serious topic for discussion and going into it in this paper will divert the main purpose of this article. I will write about this in a separate article.)
Why is bank a preferred option to depositors
Any person who wants to invest his funds looks for basically three factors
-the income /yields that his investments will fetch
-security of his funds
-liquidity (the ease with which one can deposit/withdraw funds)
The banks score very high on the second and third factors while they score only moderate or average on the first factor.
Due to the above positive factors and the high risk involved in other forms of investment like shares and mutual funds the flow of funds into the banking system has been consistently at a high rate.
It should be noted that due to this faith the bank deposits have kept growing in spite of the much lower returns offered by the banks compared to the other forms of investments.
Role of bank deposits in the economy
The growth of bank deposits is crucial in more than one way to the economy of the country. Some of them are stated briefly here:
- Banks have been a reservoir into which the savings of the vast majority of the population have been channelised into. Banks have given a great impetus to the savings culture.
- With this resource base banks have advanced funds to both individuals and business enterprises for the phenomenal growth of various sections of the economy.
- With their wide network of branches the banks are easily accessible to a large section of the population.
(These are my observations in my article “Bank Depositors- a Discriminated Class”)
Scheduled Commercial Banks and Co-Operative Banks were once the only Institutions that were authorized to take Deposits from the Public. Over a period of time several others have been permitted to take deposits from the Public. These include Companies registered under the Companies Act, Housing Societies, Housing Financing Companies, NBFCs (Non Banking Financing companies), etc.
The Reserve Bank of India is the Regulator of the Commercial Banks and is empowered to monitor their operations. It is regrettable that the role of the RBI itself is subjected to question in view of some of the latest developments.
However in respect of the other Institutions mentioned above RBI has no or very little control. They are regulated by various other Acts/ bodies.
Thus it can be seen that the DICGCI cover (up to the limit) is available in respect of Deposits with Banks and Co-operative Banks and not with the other Institutions.
In case of liquidation or winding up of these Institutions the Depositors will get an amount as determined by the Official Liquidator and according to their ranking of the Creditors.
In the light of the above the following suggestions are made:
- The DICGCI should be bifurcated into two entities one dealing with the Deposits and another dealing with Advances.
- The Deposit Insurance Company (DIC) should function similar to a General Insurance Company
- The scope of the Deposit Insurance should be widened to all Deposits with the Scheduled Commercial Banks, Co-operative Banks, Companies registered under the Companies Act, Housing Societies, Housing Financing Companies, NBFCs (Non Banking Financing companies), etc.
- All deposits of the Depositor should be covered under Insurance irrespective of the Value of the Deposit. In other words the entire amount of deposits of a person with any Institution which is under Liquidation should be paid back.
- The DIC should give a RATING to all the Deposit taking Institutions after taking into account their business and risk exposures.
- The Premium to be paid to DIC will differ from company to company based on their Rating.
- The Premium should be shared equally or in any suitable ratio by the Deposit Taking Company and the Depositor. (Even in the present case the Banks pass on the premium to the Depositors indirectly by way of lower interest rates). (Bank interest rates are fixed after absorbing all their costs). The actual working of this is explained by way of an example below. (*)
- The existing Funds with the DICGCI should be transferred to the new DIC. The DIC should have powers to invest the funds in a secure and profitable manner.
- The DIC should be brought under the Supervision of a Regulator like The Insurance Regulatory and Development Authority (IRDA).
- Anti Depositor Provisions like the ‘Bail In’ clause in the new law or any other Law/Act should be totally done away with.
(*) Premium Calculations:
At present the DICGCI is collecting a premium of 12 Paise per Rs.100 of deposits from the Banks.
This works out to Rs.120/- for every Rs.1,00,000/- of deposit.
Suppose the premium is raised to Rs.200/- for every Rs.1,00,000/- of deposit in respect of a High Rated Bank and the premium is shared equally by the Bank and the Depositor, then Per year,
The cost to the Bank will be Rs.100/- per Rs.1,00,000/- of deposit, and
The cost to the Depositor will be Rs.100/- per Rs.1,00,000/- of deposit,
It can be seen that the Banks would be paying slightly less premium than what they are paying now and
The Depositor would not mind paying Rs.100/- per Rs.1,00,000/- per year to safe guard his Principal amount of deposit. If a depositor is getting an interest of 6%p.a. from the Bank, then out of Rs.6000/- he need to pay only Rs.100/-. Which effectively means his return is 5.9% p.a.
ELUCIDATIONS OF THE ABOVE SUGGESTIONS.
- A separate Entity would be better equipped to deal with the issues involved as well as manage the funds that would be accruing to it. As the scope of the cover is widened to a larger base of depositors a new Institution that is properly constituted and monitored by an appropriate Regulatory authority would be essential.
- Further the Institution is also required to assess and grade the Deposit Taking Institutions. This would require adequate infrastructure as well as specialized personnel.
- As the premium collected will vary according to the Rating/Grade the Institution will also need experts in the field of assessing the risks and arriving at the appropriate premiums.
- Thus for an Institution with a High Rating (Low Risk) the Premium will be less and for an Institution, like a co-operative Bank, with Lower Rating (High Risk), the Premium will be much higher.
- This will facilitate a Depositor to assess the risk of a particular Institution before investing his funds.
- In a competitive market, in order to secure the maximum business, every Institution will try to obtain the best rating by following healthier business practices.
- The idea of the Depositor also sharing a portion of the Premium cost is to make him/her also a stake holder as it is their money that is at risk and needs to be protected. Considering the risk of total loss of the Principal amount (in the present context) the premium suggested above is not a very heavy burden on the Depositor.
- As the scope of the deposits under cover has been widened and also due to the variable premium rates the DIC would receive substantially higher Premium Funds than at present. Hence there should be strict monitoring of the deployment of funds in a safe and secure manner as well as ensure they yield good returns.
- As a measure of Depositors’ welfare the following is suggested:
Where ever a Depositor has paid Premiums continuously for a period of 5 years and there was no claim paid to him/her during the period, a rebate could be given to him/her on all future premium payments. The rebate could be say 20 or 30% of the premium. The rebate is only for the Depositor and not for the Institution who would pay the normal premium.
- At present the Banks obtain a credit rating of their Borrowers in the form of CIBIL score (Credit Information Bureau of India Limited) before they lend. In the case of Depositors also they are Lenders of their Money to the Banks/Institutions. Thus it would be appropriate if the Borrowers (Banks/Institutions) are also Rated.