Relevance: GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Key Phrases: Private and Cooperative Banks, Insuring Bank Deposits, Deposit Insurance and Credit Guarantee Corporation, Savings, Current, Recurring, and Fixed Deposits, Bailing out co-op banks, Tax revenue for the Centre, Penalising PSU bank, Funds diversion.

Why in News?

• Only private and cooperative banks must be made to pay deposit insurance, not the public sector banks.

Context:

• The concept of insuring bank deposits received attention for the first time in 1948 after the banking crisis in Bengal. Serious thought to insuring deposits was, however, given by the RBI and the Centre after the failure of the Palai Central Bank Ltd. and the Laxmi Bank Ltd. in 1960. The Deposit Insurance Act, 1961 came into force on January 1, 1962.
• The effective coverage of deposit was enhanced to ₹5 lakhs from February 4, 2020. Before that the limit was ₹1,00,000 since 1st May 1993. Originally in 1962, when the scheme was started the coverage was only for ₹1,500.

What is Deposit Insurance and Credit Guarantee Corporation?

• Deposit Insurance and Credit Guarantee Corporation (DICGC) is a wholly-owned subsidiary of the Reserve Bank of India (RBI). It provides deposit insurance that works as a protection cover for bank deposit holders when the bank fails to pay its depositors.
• The agency insures all kinds of deposit accounts of a bank, such as savings, current, recurring, and fixed deposits up to a limit of Rs. 5 lakh per account holder per bank. In case an individual's deposit amount exceeds Rs.5 lakh in a single bank, only Rs.5 lakh, including the principal and interest, will be paid by DICGC if the bank becomes bankrupt.

What is Not Covered Under DICGC?

• Deposits of State or Central governments.
• Deposits from foreign governments.
• State land development banks depositing with the state co-operative bank.
• Inter-bank deposits.
• Funds that are due on account of India and deposits received outside India.
• Funds exempted by the corporation with the previous approval from RBI.

Objective of Deposit Insurance and Credit Guarantee Corporation:

• Though the scheme’s prime objective is to protect bank depositors from the impact of bank failures, it has also served other unstated purposes like:
  • Bailing out cooperative banks at the cost of commercial banks.
  • Generating income for the central government by way of income tax.
  • Penalising depositors of government banks without any utility.
  • Diverting sizeable deposit funds to the DICGC.

How Deposit Insurance Scheme Suffers from Faulty Design?

• Bailing out cooperative banks:
  • For 2020-21 out of total premium of ₹17,517 crore collected, the share of cooperative banks was just ₹1,176 crore, which is just 7.19 per cent of premium collected by DICGC. Likewise in 2019-20, they have paid 7.49 per cent and in 2019-20, paid 7.60 per cent of total premium collected. For 2020-21, DICGC settled claims pertaining only to nine cooperative banks for ₹56,3.86 crore.
  • This is not an exception. For many years now, the DICGC has been settling claims of cooperative banks from the premium collected from commercial banks including LABs and RRBs.
• Tax revenue for the Centre:
  • The Corporation has been paying income tax since 1987-88. It is assessed for Income Tax as a ‘company’ as defined under the Income Tax Act, 1961, is also subject to service tax on premium income from October 1, 2011 and is liable to Goods and Services Tax with effect from July 1, 2017.
  • The Corporation has paid Income tax of ₹6,005 crore, ₹6,950 crore, ₹7,216 crore, ₹5,184 crore and ₹7,223 crore from 2016-17 to 2020-21 respectively.
  • DICGC ideally should be exempted from Income tax. The premium received is used only for claims settlements. Hence treating premium received as income and taxing it defies logic.
• Penalising PSU bank depositors:
  • For the year 2020-21 the total insured deposit was ₹ 76,21,300 crore. Out of this, deposits from State Bank of India, other public sector banks and Regional Rural Banks were to the tune of ₹51,82,600 crore. The balance deposits are from foreign banks, private banks, payments banks, SMF and cooperative banks.
  • The basic premise of deposit insurance is to indemnify the depositors in case of bank failures and it should be applicable only for private banks, which can fail due to their limited liability structure. Since governments can always come to the rescue of public sector banks, why do we need deposit insurance for PSU banks? As public sector banks pay premium for the deposit coverage, depositors get lower interest rates and this is an indirect tax on them.
• Funds diversion to DICGC:
  • As on March 31, 2021 , the DICGC has got a capital base of ₹50 crore. But it maintains a deposit insurance fund of ₹1,29,900 crore. The corporation has investment of ₹1,32,222 crore in dated government securities and hence the funds are utilised by the government.

Way Forward:

• Over the years except with the tinkering of premium rate and amount of coverage no other major change has been initiated in deposit insurance. Though charging differential premium based on risk perception has been discussed from time to time, nothing has been done. Public sector banks and their customers are put to loss on account of defective structure.
• It is time to make a thorough study of the scheme and to effect changes. Deposit insurance should be only for private sector and cooperative banks and the premium should be based on risk factors of each unit. The scheme should not serve as a source of tax revenue and fund generation for the government.

Source: The Hindu BL

Mains Question:

Q. What is the Deposit Insurance and Credit Guarantee Scheme? How successful has the DICGC been in meeting its objectives? Examine.