Safety of deposits

Banking is all about the trust that a depositor's money will be there when he/she needs it
Safety of deposits
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Even as the outbreak of the coronavirus pandemic caused massive disruptions in every sector of Indian economy, the banking sector remained abuzz amid these disruptions. The government of India’s relief and stimulus packages announced during the Covid crisis to keep various sectors of the economy afloat were rolled out through the banks. The banking sector itself was already reeling under the pressure of covid-induced economic lockdowns as their loan books directly faced the heat. Handling the distribution of the economic packages despite being stressed was a yeoman’s job done by the banks. Though the banks were appreciated for playing a pivotal role in keeping the economy afloat amidst the Covid-19 crisis, many experts dished out their concern over the health of the banking sector. If the expert opinions are taken into account, the government-announced stimulus packages for businesses, which are mainly tailored as lines of credit, can become a cause of huge concern for the banks in future. There are apprehensions that loans extended by the banks under the stimulus packages are doubtful assets right from the date of disbursement as worries loom large that another phase of Covid crisis can shut the businesses once again. Even the pre-Covid loan portfolio of the banks is already under stress owing to a series of lockdowns which led to massive job losses and loss of incomes in households.

As the expert opinions showing concern over the performance of banks in coming times continue to hit headlines, the depositors of banks stand a worried lot. Are their deposits safe in banks? This question might be haunting the depositors. Earlier also, in pre-Covid times,

There are three recent shocking incidents that happened in a span of just a few months last year. The Reserve Bank of India (RBI) barred the depositors of the Punjab and Maharashtra Co-operative Bank and put a cap on the withdrawal of deposits. Then another fiasco happened when the depositors of the Yes Bank were also barred from withdrawing their deposits at their own will. These two incidents raised many questions about the safety of the banking system in the country. It was followed by the moratorium on depositors' money in Lakshmi Vilas Bank (LVB), ahead of its amalgamation with DBS Bank.

Notably, over a period of time the loss of confidence in banking has escalated with every crisis. And banking is all about the trust that a depositor's money will be there when he/she needs it.

Now, the Covid-induced complications in the banking system have further added to the challenges confronting the banking sector in the country. Today, the common customers, especially the depositors, now fear for their monies parked in various banks under different schemes.

Basically, banks have a long history of having termite in bad loans. Despite handholding of banks and initiating several measures by the RBI to curb the burgeoning non-performing assets (NPAs), the termite refused to die and continued to deteriorate the assets of the banks. Even as many times, we heard the banks at individual levels and their regulator saying ‘worst is over’, the fact remains that banks were merged and incidents like PMC Bank and Yes Bank fiasco happened.

As far as safety of deposits is concerned, it is important to know about the bank deposit insurance scheme where 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. We have an organisation by the name Deposit Insurance and Credit Guarantee Corporation (DICGC) which administers this insurance scheme. It helps the customers to salvage the maximum amount out of a bad situation if and when it arises.

What is the DICGC insurance on deposits all about?

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 the DICGC 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.

How much amount of deposit is insured under the scheme?

Each depositor in a bank is insured upto a maximum of Rs. 5,00,000 (Rupees Five Lakhs) 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.

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

What does deposits held in the same capacity and same right; and deposits held in different capacity and different rights mean?

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.

Meanwhile, it’s worth mentioning that the Union Finance minister Nirmala Sitharaman briefing media on Wednesday said the Deposit Insurance & Credit Guarantee Corp. Bill 2021 will be moved in the current session of Parliament to streamline the DICGC Act so that depositors are able to access their insured amounts in an easy and time-bound manner (within 90 days). These payments could take 8-10 years after the bank’s liquidation.

As per the Finance Minister’s statement, 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, even at that time, 90-day access to insured amount will set in and the insurance payment will not have to wait till the eventual resolution or liquidation of the bank,

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