Safer deposits. Leg-up for depositors

In an important legislation designed to make deposit insurance more useful to bank customers, the Centre has tabled the Deposit Insurance and Credit Guarantee Corporation (Amendment) Bill 2021 in Parliament . The Bill proposes three key changes that could vastly improve the working of deposit insurance as it stands today. One, it makes the Deposit Insurance and Credit Guarantee Corporation (DICGC) liable to pay out the insurance amount of ₹5 lakh per depositor as soon as a commercial or co-operative bank is placed under any direction that restricts depositors from withdrawing their money. Earlier, DICGC’s liablility to pay depositors began only after an order of liquidation was passed against a troubled bank. This meant that depositors had to wait unduly long to secure their money as the resolution process typically took years to complete. The Bill now requires DICGC to pay the money upfront and sets a finite deadline of 90 days for meeting depositor dues. This important amendment will also free the hands of the Reserve Bank of India and the government to address bank failures without the pressure of a run on the bank by depositors. Two, to expedite payments to DICGC from liquidated banks, the Bill gives the former a greater say in a bank’s liquidation process and allows it to assume priority over other creditors. Three, the DICGC has also been given a free hand in charging higher insurance premia from banks, with the current cap of 15 paise per ₹100 of deposit to be removed. This will go a long way in beefing up DICGC’s balance sheet.

These changes, if passed into law, will add an extra dimension to the Centre’s landmark move last year to hike the insurance coverage for individual depositors in banks from ₹1 lakh to ₹5 lakh. Depositors in scores of co-operative banks languishing under RBI-directed moratoriums can look forward to getting their hands on the insurance money immediately. Confidence in the banking system, which has been shaken by the string of co-operative bank failures and hastily fashioned rescue packages for commercial banks such as YES Bank and Lakshmi Vilas Bank, may be restored.

But to ensure that the DICGC is well-placed to fulfil its obligations under the new law, some measures may be needed to shore up its balance sheet. While its Deposit Insurance Fund of ₹1.30 lakh crore as of March 31, 2021 (1.7 per cent of the ₹76 lakh crore deposits it covers), may have been adequate when it was meeting staggered payouts for co-operative banks, it may prove quite inadequate should large commercial banks land in trouble. YES Bank, when RBI imposed its moratorium in March 2020, held a deposit base of over ₹1 lakh crore while Lakshmi Vilas Bank held over ₹20,000 crore. Allowing DICGC to levy differential premiums from individual banks based on their risk metrics, as suggested by expert committees, seems to be the best way forward. RBI, in its role as the lender of last resort and as DICGC’s parent, must also create room in its balance sheet to provide a backstop facility to DICGC, should the latter have to deal with demands that are larger than what its balance sheet can support.

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