The government’s deposit insurance agency would repay depositors within 90 days of a distressed lender going under moratorium, according to Union Finance Minister Nirmala Sitharaman.
The cabinet has approved the Deposit Insurance & Credit Guarantee Corporation (Amendment) Bill 2021. The DICGC insures up to Rs 5 lakh worth of customer deposits. The corporation, the minister said, would no longer wait for banks to be liquidated before depositors’ claims are addressed — which was the earlier practice.
The amended bill, however, will have to be passed by both houses to become a law.
The insurance cover will address 98.3% of all deposit accounts by number, and 50.9% of deposits by value, Sitharaman said. This amendment will cover public and private sector banks, Indian branches of foreign banks, local area banks, small finance banks, regional rural banks, cooperative banks and payments banks, she said.
Depositors, according to Sitharaman, usually end up waiting for eight to 10 years before they are able to access their deposits in a distressed bank. “Only after liquidation do they (depositors) get their money… Now what we are saying is, even if there is a moratorium on a bank, which means if everything is frozen and depositors are not able to take money out of their accounts, even at that time this measure will set in.”
It would be applicable for banks that are currently under moratorium and those that would come under moratorium, she said.
Within the first 45 days of the bank being put under moratorium, it would collect all information relating to deposit accounts. In the next 45 days, the DICGC will review the information and repay depositors “nearer to the 90th day”. The DICGC’s decision to repay depositors will not depend on whether the bank is being rescued by other institutions.
Typically, banks pay a minimum of 10 paise on every Rs 100 worth deposits to the DICGC as premium for the insurance cover. According to the amendment, the premium is being raised to a minimum of 12 paise.
“We are saying it should not be more than 15 paise per Rs 100. We are also making sure that we will have an enabling provision, (if) in case banks feel that this has to go up, it can go up, but within a certain prescribed limit which will be determined by the government in consultation with the RBI (Reserve Bank of India),” Sitharaman said.
Since March 2020, the RBI has put Yes Bank Ltd. and Lakshmi Vilas Bank under moratorium where depositors were restricted from withdrawing their deposits immediately, to avoid a run on the bank. Yes Bank was eventually rescued by a consortium of lenders led by State Bank of India, while Lakshmi Vilas Bank was taken over by DBS Bank India.
While both these banks were rescued within weeks of going under moratorium, the experience has been different in the case of cooperative banks.
Punjab & Maharasthra Cooperative Bank has been under moratorium since September 2019, with depositors not being able to access beyond Rs 1 lakh worth of deposits. The banking regulator is drawing up a reconstruction plan for PMC Bank where a consortium of Centrum Group and Bharatpe will take over the assets and liabilities, branch network and employees of the cooperative lender.