What are the implications of the new deposit insurance rules? If you have money in banks then read, what is the meaning of new deposit insurance rules? If you have money in the bank then definitely read
- When the bank is unable to repay the money of its depositors.
- Then the bank will have to pay up to Rs 5 lakh per depositor.
- Earlier the depositor insurance limit was only Rs 1 lakh.
A few days ago, the Union Cabinet decided to bring banks with moratorium under deposit insurance, which will bring some relief to customers who have kept their money in banks facing financially stressed situation. This has wider implications for the banking ecosystem as well as the common man. Let us know about this announcement in detail.
Following the recent announcement by Finance Minister Nirmala Sitharaman, changes have been recommended in the Deposit Insurance and Credit Guarantee Corporation (DICGC) Act, 1961. Under this Act, bank savings i.e. savings and current accounts, fixed and recurring deposits are insured up to Rs 5 lakh per depositor per bank subject to terms and conditions. Deposit insurance is claimed when a stressed bank is unable to repay its depositors and its license is canceled and liquidated by the Reserve Bank. Deposit insurance protects most of the low-value accounts held with the bank in such an event, while ensuring that the depositors do not lose outright. With the recent announcements, insurance claims can be made even when a bank is placed under a moratorium during which not only are the business operations of the bank concerned restricted but its depositors cannot withdraw their money.
Why did this happen?
There is a long way to go between the first sign of a financial crisis and the process of liquidation. We have seen recently that some banks were put under moratorium during which their depositors were unable to withdraw even their hard earned money. RBI imposes these restrictions to protect banks from sinking and (by extension of restrictions), it also protects depositors who will suffer losses due to bank sinking. However, some banks come out of these restrictions, and some do not. This way, their depositors do not have access to their money indefinitely, while sometimes they have to wait years for their money. In order to provide some relief to the depositors stuck in such limbo, the Finance Minister had announced in the Union Budget earlier this year that the provisions of DICGC would be applicable to banks with moratorium also. Now, the announcement will be put into effect.
What is DICGC?
DICGC is a subsidiary of RBI. Under the DICGC Act, banks are required to pay a premium on their deposits to the DICGC. All commercial, co-operative and rural banks as well as foreign banks with Indian branches will also have to comply with this requirement. According to DICGC, it has insured 2053 banks including 89 public, private, foreign and small finance banks, including some of the largest commercial banks in the country. There are more than 1900 co-operative banks in these banks. The chances of big banks failing or rather sinking are very less. RBI is there to see their stability. However, co-operative banks are more vulnerable. According to the DICGC, the main claims against six co-operative banks have been settled so far in 2021 alone. In 2020 their number was seven. So it is normal to see such a trend with co-operative banks.
Who will benefit?
The Finance Minister remarked that the recent decision would also be applicable to the banks currently undergoing moratorium. The incident of another co-operative bank, PMC Bank, is well known to all. Due to its moratorium, there may have been a change in policies. Small depositors of the bank are finally expected to get some relief. However, the coverage limit will be strictly enforced. Depositors of such banks can be expected to pay up to Rs 5 lakh towards the outstanding principal and interest. The Finance Minister has suggested that the process of settlement of claims will be time bound, and should be completed in 90 days. If the depositors’ dues exceed Rs 5 lakh, the redemption may have to wait indefinitely.
Are banks safe?
Till recently, the depositor insurance limit was only Rs 1 lakh. Last year it was increased five times. As per the data provided by the Finance Minister, up to 98.3% of all deposit accounts fall within this new limit. Hence, depositors can be assured that their money will be safe to the extent that their bank goes down. The recent announcement will also boost customer interest in co-operative banks and small finance banks, which often offer higher interest rates to depositors, but still customers doubt the track record, NPAs, corporate governance, stability, customer service, etc. of these banks. do not go because of With the recent announcements, depositors will try to connect with these banks as well. This is a time when interest rates are low. Higher interest returns will help depositors, especially pensioners.
However, DICGC’s protection cycle is only for depositors. Banks that have high NPAs and poor corporate governance will still have to struggle. So, just like investing, people should not only diversify their savings but also keep an eye on the activities of their banks. Amendments to the DICGC Act will keep your deposits safe, but only to an extent. Hence, you should never ignore the risks along with seeking higher returns.
(The author of this article is Adil Shetty, CEO, BankBazaar.com)
(Disclaimer: This information is being given on the basis of expert reports. Markets are subject to risks, so take your own advice before investing.) (This article is written for informational purposes only. It is for investment purposes only.) should not be construed as financial or other advice)
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