On Wednesday, the Union cabinet cleared the Deposit Insurance and Credit Guarantee Corporation (DICGC) Bill, 2021, paving the way for depositors to be able to withdraw upto Rs 5 lakh in just 90 days in case of bank failure. This comes after the government had raised the deposit insurance cover last year to Rs 5 lakh from Rs 1 lakh earlier — the Rs 1 lakh limit had been kept unchanged since 1993. Coming on the heels of recent bank failures, the most recent examples being of the Punjab and Maharashtra Cooperative Bank and the Lakshmi Vilas Bank, when restrictions were imposed on the withdrawal of deposits, these measures are designed to protect the interests of depositors and bolster confidence in the banking system.
These changes mean that most depositors in the country — 98.3 per cent of all deposit accounts and 50.9 per cent of all deposits by value — will be covered. This places India in a favourable position when compared to other countries. As Finance Minister Nirmala Sitharaman noted, deposit insurance coverage globally is for around 80 per cent of accounts and 20-30 per cent of the deposit value. For depositors who have had to wait for long periods to get their deposits which are insured against default, the latest measure will bring considerable relief. To give some perspective — in 2019-20, the number of days between de-registration of a bank and claim settlement by the DICGC was 508. In 2018-19 it was 1,425. However, now, after a bank is placed under moratorium by the Reserve Bank of India (RBI), in the first 45 days, depositor claims will be submitted to DICGC. This information will then be reviewed, and depositors will be paid over the next 45 days.
While these are important steps to protect the interests of depositors, more needs to be done. The series of financial frauds that have come to light in the recent past have exposed the limits of the central bank’s supervisory/oversight capabilities. These need to be strengthened so that gaps/weaknesses in the financial system can be identified and tackled in time. Further, considering that the amounts paid by DICGC towards claims are skewed towards cooperative banks, far stricter oversight is needed. There is also the need to bring about a robust framework for the resolution of financial firms just as an architecture was introduced for resolution of struggling non-financial firms. The government had introduced the Financial Resolution and Deposit Insurance (FRDI) Bill in Parliament in 2017, but withdrew it in 2018 on account of opposition to particular clauses. It should reintroduce the Bill, after addressing the contentious issues.