A cushion of insurance on deposits

It is a scary situation for depositors when a bank fails
A view of a closed Bank in India's New Delhi. [Representational Image]
A view of a closed Bank in India's New Delhi. [Representational Image] File: ANI

Let me begin today’s Straight Talk with the structure of banks in our country. Even as we have different kinds of banks having varied ownership structures, they together play a major role in the lives of the people.

The banks perform a duo task that is to collect deposits and to provide loans in various forms. It is pertinent to mention that the banking sector houses government-owned banks, popularly known as public sector banks, private sector banks, cooperative banks, regional rural banks and other financial institutions. and the best part is that all these banks are regulated by a single entity - the Reserve Bank of India (RBI).

The role of the Reserve Bank of India, which commenced operations on April 1, 1935, has been hailed time and again for keeping the banking system afloat during rough times through its series of regulatory measures. Our banking regulatory system got world attention when the global recession in 2008 saw many well established banks disappearing from the banking scene.

During Covid-19 pandemic, The RBI played a yeoman’s role to keep the engine of the country’s banking system running so that the bruised economy remained afloat. Precisely, the measures taken by the apex bank during the peak of Covid-19 crisis kept the common household budgets afloat and helped different segments of populations to negotiate the pandemic-induced economic crisis.However, of late, there have been some instances of bank failures in the country. When a bank is unable to pay back the money to its depositors it is called bank failure. It’s notable that a bank failure is a huge risk for a country’s economy.

Even as regulations are in place to protect depositors’ interests,  some banks were unable to pay back the money to their depositors. The instances of crisis faced by Punjab and Maharashtra Co-Operative Bank Limited (PMC Bank), Yes Bank and Lakshmi Vilas Bank shook the confidence of the depositors.

Just a few days back, the Reserve Bank of India cancelled the licence of 110 years old Rupee Co-operative Bank (RCB) Pune in August and the bank ceased to carry on banking services. The bank is no longer allowed to engage in banking activities, including accepting deposits and returning deposits, among others.

The most hit in bank failure are the depositors, particularly the high-value depositors. In such circumstances, the depositors of a failed bank would be reimbursed the amount of their deposits in line with the RBI rule, that is, up to Rs.5 lakh only.

Generally speaking, the story of a bank failure is a scary situation for depositors. 

Needless to mention that depositors are key to the existence of the banking sector and safeguarding their money is vital to ensuring a bank’s prosperity. Here the statement of the prime minister Narendra Modi in the context of depositors is worth quoting. 

Some time back he was speaking at an event here themed “Depositors First: Guaranteed Time-bound Deposit Insurance Payment up to Rs.5 lakh”. He said, “Banks play a big role in the prosperity of the country. And for the prosperity of the banks, it is equally important for the depositors’ money to be safe. If we want to save banks, then depositors have to be protected.”

Notably, there is a bank deposit insurance scheme where all deposit accounts in banks are automatically insured. If a bank suffers problems and cannot meet its obligations to repay their depositors, the account holders are paid from the deposit insurance up to the maximum limit of the deposit insurance per account.

What are the features of this deposit insurance scheme?

Deposit Insurance and Credit Guarantee Corporation (DICGC) administer deposit insurance scheme. Under this scheme, deposits of all commercial banks, local area banks and regional rural banks are insured by the DICGC. The deposits such as savings, fixed, current, recurring, etc. fall within the ambit of this scheme. However, there are certain types of deposits which are not covered in the scheme, which include deposits of governments, Inter-bank deposits, etc.

Notably, all State, Central and Primary cooperative banks, which have amended the local Cooperative Societies Act empowering the Reserve Bank of India (RBI) to order the Registrar of Cooperative Societies of the State / Union Territory to wind up a cooperative bank or to supersede its committee of management and requiring the Registrar not to take any action regarding winding up, amalgamation or reconstruction of a co-operative bank without prior sanction in writing from the RBI are also covered under the scheme. However, primary cooperative societies are not insured by the DICGC.

What is the amount a depositor can get back in case of a bank failure?

Each depositor in a bank is insured up to a maximum of Rs. five lakh for both principal and interest amount held by him/her in the same right and same capacity as on the date of liquidation/cancellation of bank’s licence or the date on which the scheme of amalgamation/merger/reconstruction comes into force.

The deposits kept in different branches of a bank are aggregated for the purpose of insurance cover and a maximum amount of up to Rupees five lakhs is paid.

If an individual opens more than one deposit account in one or more branches of a bank, all these will be considered as accounts held in the same capacity and in the same right. It means, the balances in all these accounts would be aggregated for maximum insurance cover.

If an individual also opens other deposit accounts in his capacity as a partner of a firm or guardian of a minor or director of a company or trustee of a trust or a joint account in one or more branches of the bank then such accounts would be considered as held in different capacities and different rights. Accordingly, such deposits accounts will also enjoy the maximum insurance cover.

Are deposits in different banks separately insured under the scheme?

Yes. If you have deposits with more than one bank, deposit insurance coverage limit is applied separately to the deposits in each bank.

Who pays the premium of insurance on deposits?

The premium is paid by the bank and not the depositor. It’s noteworthy that the deposit insurance scheme is compulsory for the banks and there is no scope for any bank to withdraw from it.

What is the time limit for refund?

Earlier, there was no time limit for refunds. These payments could take 8-10 years after the bank’s liquidation. Now the government has made it mandatory (to make refunds) within 90 days, i.e., three months.

Even if there is a moratorium on a bank, which means everything is frozen and depositors are not able to take money out of their account, the depositors will get their insured amount within 90 days and will not have to wait till the eventual resolution or liquidation of the bank.

What are the precautions one should take while depositing money with an institution?

Depositors have to be cautious while chasing higher returns on their investment. There are institutions offering higher rates. They should bear in mind that higher interest rates on deposits also bear higher risk.

They should ensure that they are depositing their hard earned money with a financial institution that falls under the regulatory framework of the Reserve Bank of India.

Financial institutions falling outside the ambit of the RBI framework are risky. And deposits parked with such institutions don’t fall under the deposit insurance scheme.

Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

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