The Union Cabinet has cleared the Deposit Insurance And Credit Guarantee Amendment Bill, 2021, in a move that is expected to bring relief to those who have their deposits stuck in banks which have restrictions likes moratoriums imposed upon them.
Under the amendment, depositors can avail of the deposit insurance up to ₹5 lakh offered by the Deposit Insurance And Credit Guarantee Corporation (DICGC) within 90 days of the bank being put under moratorium by the Reserve Bank of India.
The amendment will need to be passed by both Houses of Parliament for it to become a law.
The immediate beneficiaries of these changes will be the customers of Punjab and Maharashtra Co-operative Bank (PMC Bank). The Reserve Bank of India introduced a moratorium on September 24, 2019 due to under-reporting of bad loans and mismanagement.
This amendment was introduced by Finance Minister Nirmala Sitharaman while she addressed the press after a meeting of the Union Cabinet, which meets every Wednesday.
"Normally, proven history states it take 8 - 10 years; only after the complete liquidation [of the bank] to they [the customers] get their money which it owes. But now what we're saying is even if there is a moratorium on the bank, which means everything is frozen, depositors are not able to take the money out of their account, even at that time this measure [deposit insurance] will set in", she said.
On the 90-day breakup, she said it would take 45 days for the bank which is under stress to collect information on the accounts where the claims will have to be made and the next 45 days they will be given to the DICGC for checking and disbursal of the amount. This means that depositors would be able to avail deposit insurance before the liquidation or resolution (like a merger or takeover) of the bank.
Banks like YES Bank and Lakshmi Vilas Bank too were under moratoriums in March 2020 and November 2020 respectively, but quite briefly. They were quickly rescued: YES Bank by a capital infusion by a consortium of other banks led by the State Bank of India and Lakshmi Vilas Bank by being taken over by DBS Bank India.
What is deposit insurance?
Bank deposits are insured by DICGC, a subsidiary of the Reserve Bank of India, for a sum of up to ₹5 lakh per bank. This covers both the principal in the account, and interest accrued on in. This cover is extended to all banks in India: private, public, rural, small finance, payment, co-operative and foreign banks. Co-operative societies, however, are not covered.
While the cover was initially ₹1 lakh, the government increased the cover to ₹5 lakh in 2020.
The banks pay the deposit insurance premium to the DICGC of 12 paise for every ₹100 of deposits with it, which is, however, not passed on to the customer. Sitharaman said that the government would ensure that this does not exceed 15 paise.
In her press conference today, Sitharaman also said within the ₹5 lakh limit, deposit insurance covers 98.3% of all bank deposit accounts by volume (by the number of accounts) and 50.9% of all accounts by the values of these accounts. She compared these percentages with similar coverages given worldwide, saying that deposit insurance covers only 80% of all accounts, and covering only 20% - 30% of these accounts by value.
Experts recommend diversifying deposits across banks and accounts, so as to take full advantage of deposit insurance. For a detailed explanation on how deposit insurance works, refer to our video below.
Her press conference can be seen here.
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