Updated: July 28, 2021 11:45:30 pm
The Union Cabinet on Wednesday cleared changes to the deposit insurance laws to provide funds up to Rs 5 lakh to an account holder within 90 days in the event of a bank coming under the moratorium imposed by the RBI.
Earlier, account holders had to wait for years till the liquidation or restructuring of a distressed lender to get their deposits that are insured against default.
The government has also permitted raising the deposit insurance premium by 20 per cent immediately, and maximum by 50 per cent. The premium is paid by banks to the DICGC. The Centre plans to introduce the Deposit Insurance & Credit Guarantee Corporation (Amendment) Bill 2021 in the ongoing Monsoon session of Parliament.
The Rs 5-lakh deposit insurance cover, which was last year raised from Rs 1 lakh, will address 98.3 per cent of all deposit accounts by number, and 50.9 per cent of deposits by value, Finance Minister Nirmala Sitharaman said.
Globally, deposit insurance coverage is only 80 per cent globally and it covers only 20-30 per cent of deposit value, she said.
Sitharaman said depositors normally end up waiting for 8-10 years before they are able to access their deposits in a distressed bank only after its complete liquidation. Now depositors will get insurance money within 90 days, without waiting for eventual liquidation of the distressed banks.
“Only after liquidation do they (depositors) get their money of (deposit) insurance … Now what we are saying is, even if there is a moratorium on a bank, which means if everything is frozen and depositors are not able to take money out of their accounts, even at that time this measure will set in …The process is 45 days plus 45 days,” she said.
The proposed law is prospective, and not retrospective, but it will cover banks already under moratorium and those that could come under moratorium. Within the first 45 days of the bank being put under moratorium, the DICGC would collect all information relating to deposit accounts. In the next 45 days, it will review the information and repay depositors within a maximum of 90 days.
In the Union Budget 2021-22, Sitharaman announced the government’s plan to streamline the law “so that if a bank is temporarily unable to fulfil its obligations, the depositors of such a bank can get easy and time-bound access to their deposits to the extent of the deposit insurance cover.”
Deposits in public and private sector banks, local area banks, small finance banks, regional rural banks, cooperative banks, Indian branches of foreign banks and payments banks are all insured by the DICGC, which is a fully owned subsidiary of the Reserve Bank of India (RBI). In the event of a bank going bust in India, a depositor has claim to a maximum of Rs 5 lakh per account as insurance cover — even if the deposit in their account far exceeds Rs 5 lakh.
Banks currently pay a minimum of 10 paise on every Rs 100 worth deposits to the DICGC as premium for the insurance cover, which is now being raised to a minimum of 12 paise. “We are saying it should not be more than 15 paise per Rs 100. We are also making sure that we will have an enabling provision, in case banks feel that this has to go up, it can go up, but within a certain prescribed limit which will be determined by the government in consultation with the RBI,” Sitharaman said.
After the RBI put Yes Bank and and Lakshmi Vilas Bank under moratorium, depositors were restricted from withdrawing their deposits immediately. The RBI subsequently facilitated the rescue of these lenders; Yes Bank taken over by a consortium of lenders led by State Bank of India, and Lakshmi Vilas Bank by DBS Bank India. Another lender Punjab & Maharasthra Cooperative Bank is under moratorium since September 2019, with depositors not being able to access funds beyond Rs 1 lakh. The proposed change in the law will enable providing relief in such cases.
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