Following the 2008 Global Financial Crisis, particularly the US government’s heavy spending to bail out some troubled TBTF (Too-BigTo-Fail) Banks, the idea of bailin, in place of bailout, began to gain ground widely in the financial world. Simply put, a bailout involves propping up the failing banks with money from outside (say the exchequer) to safeguard the banks’ (in other words, depositors’) interest while bail-in implies protecting the banks with the support of the stakeholders’ ~ that includes depositors’~ money. What a paradox! A shift from using public money to protect public deposits to using the very same deposits to protect the failing banks.
These thoughts frighten bank depositors, just as news of the occasional bank failure does. To alleviate their fears, the Indian government, inter alia, has enhanced the DICGC (Deposit Insurance and Credit Guarantee Corporation) coverage limit of bank deposits from Rs One lac (in force from 1 May 1993) to Rs. Five lac, effective 4 February 2020. That prima facie means the depositor’s money up to Rs Five lac is safe come what may.
But there is more to it than meets the eye. It is good if the depositors know how their money is safe to that extent and how they can secure it even more. They need to know which among the innumerable banks and branches around them is safe. For this understanding, an understanding of the genesis, evolution and functioning of the DICGC, though briefly, would be of great help to the bank depositors. The banking crisis that erupted in Bengal in 1948 made the government think about some protection to the depositors to guard against the recurrence of similar failures in the country although no immediate action was taken, not even after the Rural Banking Enquiry Committee’s reassertion in 1950. It was only in 1960, after the failure of two more banks in the country, Laxmi Bank and Palai Central Bank Ltd. that the government introduced a Depositors’ Insurance Corporation (DIC) Bill 1961 which came into force in January 1962 after its passage in Parliament and the President’s assent.
This first enactment to provide insurance coverage to bank deposits is known as Deposit Insurance Act, 1961. As its name suggests, it covered only the deposits, not credit. The DIC which covered only commercial bank deposits in the beginning, started including, after the 1968 amendment, the cooperative banks’ deposits also. The deposit amount covered in the beginning was Rs 1,500 which was gradually increased to Rs One lac in about 60 years before the quantum jump to Rs Five lac in 2020. The insurance premium is 0.12 per cent raised gradually from 0.05 in the beginning and 0.04 per cent in 1971. The burden of paying the premium is exclusively on the banks; the depositors need not pay it. Now let us come to the Credit Guarantee (CG) part of the DICGC. The RBI promoted a Credit Guarantee Corporation of India Ltd, a public limited company in 1971, to support bank credit to the poor and priority sectors.
Then in 1971, the Deposit Insurance Corporation and Credit Guarantee Corporation of India were merged to form Deposit Insurance and Credit Guarantee Corporation (DICGC) and the Deposit Insurance Corporation Act, 1961 was renamed as Deposit Insurance and Credit Guarantee Act, 1961. But by April 2003, all banks had gradually withdrawn their participation with regards to credit. So, the DICGC’s main function thereafter remains deposits insurance alone. This does not mean banks have the freedom to withdraw from the deposits’ coverage function, too. No, if they do that, they will forego the RBI’s license to function as a bank. So, the deposits are safe to the extent guaranteed in all the banks covered by the DICGC. It is clear from the DICGC’s website that the 2025 banks are spread in ten categories: Public Sector Banks (12); Private Sector Banks (21); Foreign Banks (44); Small Finance Banks (12); Payment Banks (6); Regional Rural Banks (43); Local Area Banks (2); State Cooperative Banks (33); District Central Cooperative Banks (352) and Urban Cooperative Banks (1,500).
The government claims that the depositors and their deposits are largely protected with the hike in insurance coverage to Rs. 5 lac when a bank fails/goes into liquidation and also when the RBI issues the All-Inclusive Direction (AID) to banks when it senses something wrong. Finance Minister Nirmala Sitharaman stated that 98.3 per cent of the deposit accounts and 50.3 per cent of the deposit value is covered. This we may understand as assessable deposits excluding ineligible for coverage sums like those of governments ~ state, central and foreign ~ deposits. Banks in India have a huge amount of deposits signifying the people’s confidence in them. As of March 2023, the scheduled commercial banks had Rs 190.35 lac crore deposits which account for 70.80 per cent of the estimated nominal Gross Domestic Product of Rs 273.07 lac crore. Let us now turn to the nitty-gritty of protecting Rs.5 lac (both principal and interest together) and more in any bank covered under the DICGC (the name of each bank is available for public verification on the DICG’s site). The rule: “Same Right and the Same Capacity.”
If a person, for example, has several accounts ~ savings bank, recurring deposit, term deposit, etc. ~ in one bank or several branches of the same bank, the balance in all these accounts is summed, which works out to say some Rs 25 lac whereas protection is given for just Rs 5 lac of it. Instead, if the same person in the same bank holds interest differently, for example, one account in his name, another a joint account with the spouse, another with son as guardian, another as a first partner of the partnership, and yet another as second partner and so on, all these accounts are treated as different accounts and if one has ten accounts like this, he will get protection up to Rs 50 lac (Rs 5 lac x 10=Rs 50 lac). Instead of all this, if a person holds accounts in several banks, he or she gets protection separately, in other words, Rs. 5 lac in each bank. Undoubtedly, the DICGC protection is beneficial to the extent it provides it, but not fully.
The people hope that the RBI, the extended arm of the government, which licenses the banks, has full responsibility to ensure full protection to bank deposits. The government therefore needs to regulate fully and protect all deposits in all banks because the deposits belong to the depositing public no matter whether the bank is privately owned, government-owned, or a cooperative.
(The writer is a development economist and commentator on economic and social affairs)