It is reported that the government is considering tabling amendments to the Deposit Insurance and Credit Guarantee Corporation Act during the monsoon session of Parliament. Last year, the government quintupled insurance coverage on deposits to ₹ 5 lakh to support depositors in troubled banks like Punjab and Maharashtra Co-operative Bank.
The deposit insurance system has many flaws and for the past 58 years a comprehensive study of the effectiveness of the system has never been undertaken.
The DICGC hsd, until March 31, 2020, has settled claims amounting to 295.85 crore due to 27 commercial bank failures. During the same period, it settled claims amounting to 5,198.83 crore as a result of the bankruptcy of 357 cooperative banks.
Thus, the amount of debts settled for cooperative banks is 18 times higher than that of commercial banks. Even for the last fiscal year 2019-2020, the DICGC settled 100% of the claims on the cooperative banks, amounting to 80.65 crore.
For decades, there have been discussions about imposing a differential premium based on the perception of risk. But no decision has been made yet. The DICGC collects the same premium from everyone and has commercial banks compensated for the failure of the cooperative sector.
How is the blanket made
In 2019-2020, insurance coverage was provided to 99 commercial banks (including 13 public sector banks), 45 RRBs and a whopping 1,923 cooperative banks. The insured deposit of commercial banks is huge, at 30.58,100 crore, while it is 2.41,000 crore for RRBs and 3.96,900 crore for cooperative banks. As ORRs are mostly sponsored by commercial banks, their coverage can be grouped under them.
Thus, the coverage of insured deposits for commercial banks is more than eight times that of cooperative banks, which means that the DICGC collects eight times more premiums from commercial banks. Over the years, premiums collected from commercial banks have been used to bail out cooperative banks.
Any insurance plan can only be viable when the number of claims is low in relation to the number of units covered. Where there are 1,923 high-risk cooperative banks, they cannot be combined with a smaller segment of 99 lower-risk commercial banks. The risk varies depending on the type of bank and therefore the coverage may not be uniform.
Look in another dimension, of the insured deposits of commercial banks of 30,58,100 crore, 23,45,900 crore belong to the State Bank of India and other public sector banks. No sovereign government, with a majority stake in these banks, can afford to let these banks fail and go into liquidation.
In accordance with this arrangement, DICGC is required to pay the liquidator the claim amount of each deposit up to ₹ 5 lakh within two months from the date of receipt of the liquidator’s claim list and the liquidator is to pay the amount of the claim to each. insured depositor.
As this can take a long time, it is better if the amount is prepaid after the moratorium is applied to a bank and to that extent the proposed amendment will be useful for depositors.
To settle the large number of claims, the DICGC must increase the premium appropriately; it now charges 12 paisa per 100 of assessable deposits.
In accordance with the conditions of cover, the financial burden linked to the payment of the premium must be borne by the banks themselves and not be passed on to depositors. However, even when the premium is not recovered from customers, they pay it indirectly through a reduced interest rate on deposits.
It would be better if government banks were exempt from deposit insurance and the premium was based on each bank’s perception of risk. In addition, the depositor should be given the opportunity to decide whether or not he wants insurance coverage.
The writer is a retired banker