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The Deposit Insurance and Credit Guarantee Corporation (DICGC) should create a revival and merger fund with a corpus of 10 per cent of the amount in the Deposit Insurance Fund (DIF) to ensure that banks, especially urban co-operative banks (UCBs), get support before they get into solvency problem, according to D Krishna, former Chief Executive, National Federation of UCBs and Credit Societies.
This suggestion comes in the backdrop of the depositors of the scam hit Punjab and Maharashtra Co-operative (PMC) Bank taking to the streets to get their money back. It has been nearly a month since the RBI clamped down on the Bank even as depositors are desperate to get their hard earned money back.
DIF had a balance of Rs 93,750 crore as at March-end 2019. DICGC, which is an arm of the RBI, insures all bank deposits, such as saving, fixed, current, and recurring. The insurance cover is limited to Rs 1 lakh only per depositor(s) for deposits held by him (them) in the "same right and in the same capacity" in all the branches of the bank taken together.
“Instead of sitting on the fund with substantial addition to it each year, a revival and merger fund with a corpus of 10 per cent of the amount in DIF can be created which will ensure supporting banks before they get into solvency problem, and the DICGC can further reduce its payout of deposit insurance obligations as lesser number of banks will get liquidated," said Krishna.
DIF corpus
The DIF corpus has seen substantial accretion in the last five financial years: Rs 9,840 crore in FY15, Rs 9,800 crore in FY16, Rs 9,900 crore in FY17, Rs 11,280 crore in FY18 and Rs 12,320 crore in FY19.
Krishna, who has been member of various committees of RBI, including the high power committee on Urban Cooperative Banks and Standing Advisory Committee, observed that the role of DICGC also needs to change from an organisation that is providing minimal insurance support to banks and ends up making substantial profits to one which is actively helping the banks to grow.
The co-operative banking expert felt that Section 21 of the DICGC Act needs to be revisited. As per this Section, the Corporation gets the first charge on all the recoveries made by a bank under liquidation and only after paying the DICGC, the full amount of the claim paid by it, will the depositor be paid.
The depositors’ interest should stand in priority against the demand of the DICGC and not vice versa, which it is now, he added.
Krishna said the limit of amount of insured deposit needs to be revised upwards from Rs 1 lakh, which was fixed way back in 1993, to Rs 5 lakh, with a sublimit of Rs 1 lakh exclusively for savings bank accounts.
Amitha Sehgal, Honorary Secretary, All India Bank Depositors' Association, said when banks open a customer's savings account and/or accept fixed deposits, it is in a way a contract between the banks and the depositors. Therefore, banks have fiduciary and legal obligation towards the depositors to ensure safety of depositors' funds.
"Hence, banks cannot hide behind RBI sponsored DICGC cover to limit their liability to only up to Rs 1 lakh. Indeed, this deposit insurance cover is extremely low in international comparison and the fact that it was fixed way back in 1993.
"Even considering the inflation factor of the last 26 years, the deposit insurance cover should have been Rs 5 lakh as of today," said Sehgal.
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