According to Union Finance Minister Nirmala Sitharaman, the government’s deposit insurance agency would repay depositors within 90 days after a distressed lender was put under moratorium.
Cabinet approved the Deposit Insurance & Credit Guarantee Corporation’s 2021 bill (Amendment). The DICGC insures a customer’s deposits worth up to Rs 5 lakh. The company, the minister said, would no longer wait for the banks to be liquidated before processing depositors’ claims – which used to be the practice.
However, the amended bill must be passed by both Houses to become law.
Insurance coverage will cover 98.3% of all deposit accounts by number and 50.9% of deposits by value, Sitharaman said. This change affects public and private sector banks, Indian branches of foreign banks, local banks, small finance banks, regional rural banks, credit unions and payment banks, she said.
According to Sitharaman, depositors typically wait eight to ten years before they can access their deposits with a distressed bank. “Only after the liquidation do they (depositors) get their money … What we are saying now is even if there is a moratorium on a bank, that is, when everything is frozen and the depositors cannot withdraw money from their accounts, too then this measure will take effect. “
It would apply to banks that are currently under a moratorium and banks that would be under a moratorium, she said.
Within the first 45 days of the bank’s moratorium, it would collect all information on the deposit accounts. Over the next 45 days, the DICGC will review the information and pay depositors “closer to the 90th day”. The DICGC’s decision to pay depositors does not depend on whether the bank is bailed out by other institutions.
Typically, banks will pay at least 10 Paise for every Rs 100 deposit made to the DICGC as a premium for insurance coverage. According to the amendment, the premium will be increased to at least 12 Paise.
“We say it shouldn’t be more than 15 paise per 100 rupees. We also ensure that we have an enabling provision (if) if banks feel it needs to go up, it can go up, but within “a certain prescribed limit set by the government in consultation with the RBI (Reserve Bank of India), ”said Sitharaman.
Since March 2020, RBI Yes Bank Ltd. and Lakshmi Vilas Bank placed under a moratorium preventing depositors from withdrawing their deposits immediately to avoid a run on the bank. Yes Bank was eventually bailed out by a consortium of lenders led by the State Bank of India, while Lakshmi Vilas Bank was taken over by DBS Bank India.
While both banks were bailed out within a few weeks of the moratorium, the experience of cooperative banks is different.
The Punjab & Maharasthra Cooperative Bank has been subject to a moratorium since September 2019, whereby depositors can no longer access deposits worth over Rs 1 lakh. The banking supervisory authority draws up a restructuring plan for the PMC Bank, in which a consortium of Centrum Group and Bharatpe takes over the assets and liabilities, the branch network and the employees of the cooperative lender.