<p>In February this year, the Reserve Bank of India superseded the board of Mumbai-based New India Cooperative Bank (NICB) and imposed restrictions on the deposit and withdrawal of funds. </p><p>The RBI cited supervisory concerns and a deteriorating liquidity position in the wake of a fraud amounting to Rs 122 crore. However, two weeks later, the restrictions were relaxed, allowing depositors to withdraw up to Rs 25,000.</p>.<p>A forum representing NICB depositors submitted a petition to the RBI, urging immediate steps to revive the bank. The petition argued that a fraud of Rs 122 crore in a bank with deposits worth Rs 2,500 crore did not justify such harsh measures, which had caused undue hardship to thousands of depositors. Among other concerns, the forum has revived an ongoing debate about the inadequacy of the current deposit insurance cover of Rs 5 lakh, provided by the Deposit Insurance and Credit Guarantee Corporation (DICGC). <br></p><p>The depositors also questioned why they should suffer for the mismanagement of bank officials.</p>.<p>In a press release dated February 14, the DICGC stated that it would pay all eligible depositors of NICB by May 15 under Section 18A of the DICGC Act, 1961 — subject to NICB submitting a claim list before March 30. Affected depositors can check their claim status by logging in to the corporation’s portal, Daava Sochak.</p>.<p>DICGC, a wholly owned subsidiary of RBI, was established to maintain stability and public confidence in the Indian banking system by providing deposit insurance, particularly for the benefit of small depositors. It no longer provides credit guarantees after the relevant scheme was discontinued in 2003. The deposit insurance scheme is mandatory for all banks operating in India, and each participating bank pays a premium of 0.12 per cent on its assessable deposits.</p>.<p>As of March 31, 2024, 1,997 banks were covered under the scheme, including 1,857 cooperative banks and 140 commercial banks. The coverage ratio, in terms of the number of accounts insured, stood at 97.8 per cent.</p>.<p>Under the scheme, a depositor is insured up to a maximum of Rs 5 lakh, covering both principal and interest, held in the same right and capacity across accounts. While banks pay premiums on the entire assessable deposit, DICGC caps the payment at Rs 5 lakh per depositor of a bank placed under all-inclusive directions. For instance, if a depositor has Rs 1 crore, the premium is paid by the bank on the entire amount, but the depositor receives only Rs 5 lakh if the bank collapses. This limit applies across all deposit types— savings, current, fixed, and recurring —held<br>at different branches of the same bank.</p>.<p>While deposits in commercial banks are generally safe, cooperative banks have been failing more frequently. A common argument against increasing the deposit insurance is that premiums paid by banks are already low. However, DICGC’s balance sheet for FY 2023-24 tells a different story. The corporation settled claims worth only Rs 1,432 crore during the year, while it collected Rs 23,879 crore in insurance premiums — 94 per cent came from commercial banks.</p>.<p>The DICGC maintains a deposit insurance fund (DIF) to manage the deposit insurance scheme. Since the claims settled is a small portion of the premium received, DICGC has been able to build a healthy Deposit Insurance Fund which stood at Rs 1,98,753 crore as of March 31, 2024. There is also an inflow of small amounts out of the recoveries made from the liquidators and transferee banks. The corporation invests this amount in government securities and earns interest. All this makes a strong case for a hike in the insurance cover, and there are demands from various quarters that the cover should be increased to Rs 10 lakh.</p>.<p>What could be the impact of the hike in insurance cover for the many stakeholders? For DICGC, a doubling of deposit insurance from Rs 5 lakh to Rs 10 lakh without increasing the premium may not impact it much since the total claims paid since its inception in 1962 are only Rs 16,326 crore. For the banks, if the premium is increased from 12 paise to 15 paise per Rs 100 deposit, i.e., by 25 per cent, their profitability, which is already under pressure due to compression in net interest margins (NIM) and deposit coverage ratio, would come down significantly. Banks can also pass on a part of the hike to depositors. Banks can also have differential premium rates and look at the possibility of recovering the premium from depositors who are willing to pay for a cover exceeding Rs 10 lakh.</p>.<p><em>(The writer, a CFA and a former banker, currently teaches at Manipal Academy of Higher Education, Bengaluru)</em></p>
<p>In February this year, the Reserve Bank of India superseded the board of Mumbai-based New India Cooperative Bank (NICB) and imposed restrictions on the deposit and withdrawal of funds. </p><p>The RBI cited supervisory concerns and a deteriorating liquidity position in the wake of a fraud amounting to Rs 122 crore. However, two weeks later, the restrictions were relaxed, allowing depositors to withdraw up to Rs 25,000.</p>.<p>A forum representing NICB depositors submitted a petition to the RBI, urging immediate steps to revive the bank. The petition argued that a fraud of Rs 122 crore in a bank with deposits worth Rs 2,500 crore did not justify such harsh measures, which had caused undue hardship to thousands of depositors. Among other concerns, the forum has revived an ongoing debate about the inadequacy of the current deposit insurance cover of Rs 5 lakh, provided by the Deposit Insurance and Credit Guarantee Corporation (DICGC). <br></p><p>The depositors also questioned why they should suffer for the mismanagement of bank officials.</p>.<p>In a press release dated February 14, the DICGC stated that it would pay all eligible depositors of NICB by May 15 under Section 18A of the DICGC Act, 1961 — subject to NICB submitting a claim list before March 30. Affected depositors can check their claim status by logging in to the corporation’s portal, Daava Sochak.</p>.<p>DICGC, a wholly owned subsidiary of RBI, was established to maintain stability and public confidence in the Indian banking system by providing deposit insurance, particularly for the benefit of small depositors. It no longer provides credit guarantees after the relevant scheme was discontinued in 2003. The deposit insurance scheme is mandatory for all banks operating in India, and each participating bank pays a premium of 0.12 per cent on its assessable deposits.</p>.<p>As of March 31, 2024, 1,997 banks were covered under the scheme, including 1,857 cooperative banks and 140 commercial banks. The coverage ratio, in terms of the number of accounts insured, stood at 97.8 per cent.</p>.<p>Under the scheme, a depositor is insured up to a maximum of Rs 5 lakh, covering both principal and interest, held in the same right and capacity across accounts. While banks pay premiums on the entire assessable deposit, DICGC caps the payment at Rs 5 lakh per depositor of a bank placed under all-inclusive directions. For instance, if a depositor has Rs 1 crore, the premium is paid by the bank on the entire amount, but the depositor receives only Rs 5 lakh if the bank collapses. This limit applies across all deposit types— savings, current, fixed, and recurring —held<br>at different branches of the same bank.</p>.<p>While deposits in commercial banks are generally safe, cooperative banks have been failing more frequently. A common argument against increasing the deposit insurance is that premiums paid by banks are already low. However, DICGC’s balance sheet for FY 2023-24 tells a different story. The corporation settled claims worth only Rs 1,432 crore during the year, while it collected Rs 23,879 crore in insurance premiums — 94 per cent came from commercial banks.</p>.<p>The DICGC maintains a deposit insurance fund (DIF) to manage the deposit insurance scheme. Since the claims settled is a small portion of the premium received, DICGC has been able to build a healthy Deposit Insurance Fund which stood at Rs 1,98,753 crore as of March 31, 2024. There is also an inflow of small amounts out of the recoveries made from the liquidators and transferee banks. The corporation invests this amount in government securities and earns interest. All this makes a strong case for a hike in the insurance cover, and there are demands from various quarters that the cover should be increased to Rs 10 lakh.</p>.<p>What could be the impact of the hike in insurance cover for the many stakeholders? For DICGC, a doubling of deposit insurance from Rs 5 lakh to Rs 10 lakh without increasing the premium may not impact it much since the total claims paid since its inception in 1962 are only Rs 16,326 crore. For the banks, if the premium is increased from 12 paise to 15 paise per Rs 100 deposit, i.e., by 25 per cent, their profitability, which is already under pressure due to compression in net interest margins (NIM) and deposit coverage ratio, would come down significantly. Banks can also pass on a part of the hike to depositors. Banks can also have differential premium rates and look at the possibility of recovering the premium from depositors who are willing to pay for a cover exceeding Rs 10 lakh.</p>.<p><em>(The writer, a CFA and a former banker, currently teaches at Manipal Academy of Higher Education, Bengaluru)</em></p>
