A bill was passed Monday at Lok Sabha to help small depositors save in troubled banks. The Deposit Insurance and Credit Guarantee Corporation (Amendment) Bill 2021 aims to help small depositors, especially people who have savings in troubled banks like Punjab and Maharashtra Co- Operative Bank Ltd.
Once the amendment comes into force, it will help make three key changes aimed at making insurance work better for depositors.
Read | Depositors of troubled banks will receive insurance money within 90 days of the moratorium
HOW WILL IT HELP DEPOSITORS?
First, the Deposit Insurance and Credit Guarantee Corporation (DICGC) will be required to pay the insurance amount of Rs 5 lakh per depositor as soon as a commercial or cooperative bank is subject to a moratorium that prevents it from withdraw his money.
Previously, the DICGC was only required to pay depositors after a liquidation order had been issued against any bank in difficulty. This resulted in a long wait for depositors to access their own money as the resolution process went on for years.
Under the amended law, DICGC must pay depositors in advance within 90 days, which is the deadline for payment of contributions.
RBI BENEFITS
The amendment also facilitates the procedures of the Reserve Bank of India (RBI) in such cases. After putting a troubled bank under directives or moratorium, the central bank was under tremendous pressure to go for a quick resolution, as the pressure from depositors was immense.
“The days when the RBI had to create hasty bailouts are over,” said a senior finance ministry official.
The second benefit of the amendment to the law is that it gives the RBI operated DICGC more weight in the bank liquidation process. The DICGC would henceforth have priority over creditors.
In addition, DICGC’s balance sheet is expected to improve as it is free to charge higher insurance premiums to banks as the current cap of 15 paise per Rs100 of deposit will be removed.
The amendment to the law will strengthen the Centre’s decision last year to increase insurance coverage for individual depositors in banks from Rs 1 lakh to Rs 5 lakh. Since almost 98% of accounts in Indian banks are less than Rs 5 lakh, the new rule protects the interests of majority depositors.
Read also | Budget 2021: the government promises customers “limited time” access to their deposits if a bank goes bankrupt
The government announced the move after depositors at troubled banks like PMC had to go through tough times. There are several cooperative banks under moratoriums run by the RBI.
In a brief debate in Rajya Sabha last week, Finance Minister Nirmala Sitharaman said the legislation will help depositors of 23 cooperative banks facing tensions. “PMC Bank depositors will also benefit from this bill,” she said.
