It is about Deposit Insurance in India

1. Deposit Insurance
Presentation by
Thomas Mathew
IV Sem. LL.M
JSSLC – Mysuru

2. Content
 Introduction
 Origin of Deposit Insurance in India
 Objectives of DICGC
 Legal Framework of DICGC
 Major Features of Deposit Insurance System
 Banks covered by Deposit Insurance
 Types of Deposits Covered
 Level of Deposit Insurance Coverage
 Premium Rates
 Interest
 Capital structure of the DICGC
 Management
 Inspection and Supervision
 Settlement of claims
 Withdrawal of deposit insurance coverage
 Liability of DIC to depositors
 Conclusion

3. What is insurance?
Insurance is a form of risk management
in which the insured transfers the cost
of potential loss to another entity in
exchange for monetary compensation
known as the premium.

4. Introduction
 Banks are allowed and usually encouraged to
lend or invest most of the money deposited with
them instead of safe-keeping the full amounts.
 If many of a bank's borrowers fail to repay their
loans when due, the bank's creditors, including
its depositors are at risk of loss.
 Deposit insurance was formed to protect small
unit banks in the United States when branching
regulations existed. To protect local banks in
poorer states, the federal government created
deposit insurance.

5. Origin of Deposit Insurance in
India
 Deposit insurance was introduced in India in 1962.
 India was the second country in the world to introduce such a scheme –
(the first being the United States in 1933).
 Banking crises and bank failures in the 19th as well as the early 20th
Century (1913-14) had highlighted the need for depositor protection in
India.
 After the setting up of the Reserve Bank of India, the issue came to the
forefront in 1938 when the Travancore National and Quilon Bank, the
largest bank in the Travancore region, failed.
 As a result, interim measures relating to banking legislation and reform
were instituted in the early 1940s.
 The banking crisis in Bengal between 1946 and 1948, once again revived
the issue of deposit insurance.
 It was, however, felt that the measures were wavering till the Banking
Companies Act, 1949 came into force and comprehensive arrangements
were made for the supervision and inspection of banks by the Reserve
Bank.

6.  It was in 1960 that the failure of Laxmi
Bank and the failure of the Palai Central
Bank catalyzed the introduction of
deposit insurance in India.
 The Deposit Insurance Corporation (DIC)
Bill was:
◦ introduced in the Parliament on August 21,
1961.
◦ received the assent of the President on
December 7, 1961.
◦ The Deposit Insurance Corporation
commenced functioning on January 1, 1962.
Origin of DIC…..

7.  Initially 287 banks registered with it as insured banks.
 By the end of 1967, this number was reduced to 100, (largely
as a result of the Reserve Bank of India’s policy of the reconstruction
and amalgamation of small and financially weak banks so as to make
the banking sector more viable.)
 In 1968, the Deposit Insurance Corporation Act was amended
to extend deposit insurance to 'eligible co-operative banks'.
 In 1968 there were over 1000 cooperative banks as against
the 83 commercial banks. As a result, the DIC had to expand
its operations very considerably.
 1971 The Credit Guarantee Corporation of India Ltd. (CGCI)
was established. (The establishment of the Credit Guarantee Corporation
was to ensure that the credit needs of the neglected sectors and weaker
sections were met. The essential concern was to persuade banks to make
available credit to not so creditworthy clients)
Origin of DIC…..

8.  In 1978, the DIC and the CGCI were merged to form
the Deposit Insurance and Credit Guarantee
Corporation (DICGC).
 Consequently, the title of Deposit Insurance Act, 1961
was changed to the Deposit Insurance and Credit
Guarantee Corporation Act, 1961.
 After the merger, the focus of the DICGC had shifted
onto credit guarantees.
 With the financial sector reforms undertaken in the
1990s, credit guarantees have been gradually phased
out and the focus of the Corporation is back to its core
function of Deposit Insurance with the objective of
avoiding panics, reducing systemic risk, and ensuring
financial stability.
Origin of DIC…..

9. Objectives of DIC
 Deposit Insurance had been
introduced in India out of concerns:
◦ To protect depositors,
◦ To ensure financial stability,
◦ To infuse confidence in the banking
system and
◦ To help mobilise deposits

10. Major Features of Deposit Insurance System
 The deposit insurance system is compulsory in India and no bank can
remain unregistered with the Corporation except those co-operative banks
where the State Governments/Union Territories are yet to pass the required
legislation.
 The deposits mobilised by the development financial institutions, mutual
funds and non-banking financial/non-financial companies do not come
under the purview of the deposit insurance.
 At present, DICGC provides full protection to around 93 per cent of
accounts as against 78.5 per cent in 1961. In terms of amount of deposits,
around 35 per cent of deposits are being covered, up from bout 23 per
cent in 1961.
 The Corporation operates on a forecasted deposit insurance fund, which is
built out of surplus generated by the Corporation. Premium collected from
insured banks is the main source of funds for the Corporation.
 DICGC does not have prudential regulatory or supervisory responsibilities
or intervention powers; these functions are performed by the RBI.
 The Corporation provides financial assistance to facilitate restructuring and
merger of weak banks with a sound bank.

11. Legal Framework of DICGC
 The functions of the DICGC are
governed by the provisions of 'The
Deposit Insurance and Credit
Guarantee Corporation Act, 1961'
(DICGC Act) and
 'The Deposit Insurance and Credit
Guarantee Corporation General
Regulations, 1961' framed by the Reserve
Bank of India in exercise of the powers
conferred by sub-section (3) of Section 50 of
the DICGC Act.

12. Banks covered by Deposit Insurance
 All commercial banks including the branches of foreign
banks functioning in India, Local Area Banks and Regional
Rural Banks.
 All Eligible Co-operative Banks
◦ All eligible co-operative means (as defined in Section 2(gg) of the
DICGC Act).
 All State, Central and Primary co-operative banks functioning in the
States/Union Territories which have amended their Co-operative Societies
Act as required under the DICGC Act, 1961, empowering RBI to order the
Registrar of Co-operative Societies to wind up a co-operative bank or to take
over from its committee of management and requiring the Registrar not to
take any action for winding up, amalgamation or reconstruction of a co-
operative bank without prior sanction in writing from the RBI, are treated as
eligible banks.
 At present all Co-operative banks are covered by the Scheme.
The Union Territories of Lakshadweep and Dadra and Nagar
Haveli do not have Co-operative Banks.

13. Types of Deposits Covered
In India, at present, the DIC insures all deposits
such as savings, fixed, current, recurring,
Certificates of Deposits (CDs), foreign currency
deposits etc… all deposits except the
 Deposits of foreign Governments,
 Deposits of State/Central Governments,
 Inter-bank deposits, and
 Deposits held abroad
The Deposit Insurance Scheme, by and large, covers
the Household Sectors, which is nearly two-third of
the total bank deposits in the country.

14. Level of Deposit Insurance Coverage
Initially, the insurance cover was limited to Rs.1,500 only
per depositor for deposits held by him in the " same
right and capacity " in all the branches of a bank.
This insurance limit was enhanced from time to time as
follows:
Coverage Effective from
Rs.5,000 1 January 1968
Rs.10,000 1 April 1970
Rs.20,000 1 January 1976
Rs.30,000 1 July 1980
Rs.1,00,000 1 May 1993

15. Premium Rates Per Deposit of Rs.100
1-01-1962 0.05
1-10-1971 0.04
1-07-1993 0.05
1-04-2004 0.08
1-04-2005 0.10*
*1000/1
The premium paid by the insured banks to
the Corporation is required to be absorbed
by the banks themselves so that the benefit
of deposit insurance protection is made
available to the depositors free of cost.

16. Interest
 An insured bank is required to remit
premium not later than the last day of
May and November each year.
 If it does not pay on or before the
stipulated date the premium payable
by it or any portion thereof, it is liable
to pay interest at the rate of 8% from
the beginning of the half-year till the
date of payment.

17. Capital structure of the DIC
 The DIC is functioning as a wholly-
owned subsidiary of the Reserve Bank.
 Its initial capital was Rs.1 crore
 It was subsequently enhanced to Rs.50
crore from the 1st May 1984,
 It has been meeting the operational
expenses out of the investments made
from the capital.
 In some years, this income was found to be
inadequate to meet operating expenses, which
forces it to seek grant from the Reserve Bank.

18. Management
The management of the Corporation vests with its Board of Directors,
 A Deputy Governor of the RBI is the Chairman.
 One Officer (normally in the rank of Executive Director) of the RBI,
 One Officer from the Central Government,
 Five Directors nominated by the Central Government in consultation
with the RBI,
◦ three of whom are persons having special knowledge of commercial
banking, insurance, commerce, industry or finance and
◦ two of whom shall be persons having special knowledge of, or experience
in co-operative banking or co-operative movement and
 Four Directors, nominated by the Central Government in
consultation with the RBI,
◦ having special knowledge or practical experience in respect of
accountancy, agriculture and rural economy, banking, co-operation,
economics, finance, law or small scale industry or any other matter which
may be considered to be useful to the Corporation.

19. Inspection and Supervision
 Provisions of the DICGC Act, 1961,
empowers the Corporation to have free
access to records of the insured banks,
 It is not having its own inspection machinery,
but depends on the inspection reports of the
Reserve Bank in the case of commercial and
urban banks and NABARD for the RRBs and
other co-operative banks.
 This policy is being followed in the interest of
administrative and financial convenience and
to avoid the dual inspection machinery and
duplication of staff.

20. Settlement of claims
 In the event of the winding up or liquidation of an insured bank,
every depositor of the bank is entitled to payment of an amount
equal to his deposits held by him in the same right and in the same
capacity in all the branches of that bank put together, standing as
on the date of cancellation of registration subject to the set off of his
dues to the bank.
 When a scheme of compromise or arrangement or re-construction
or amalgamation is sanctioned for a bank by a competent authority,
and the scheme does not entitle the depositors to get credit for the
full amount of the deposit on the date on which the scheme comes
into force, the Corporation pays the difference between the full
amount of deposit or the limit of insurance cover in force at the
time, whichever is less, and the amount actually received by him
under the scheme.
 However, the payment to each depositor is subject to the limit of the
insurance coverage fixed from time to time.

21. Withdrawal of deposit insurance coverage
 The Corporation may cancel the registration of an insured bank if it fails to
pay the premium for three consecutive periods.
 In the event of the DICGC withdrawing its coverage from any bank for
default in the payment of premium the public will be notified through
newspapers.
 Registration of an insured bank stands cancelled if:
◦ the bank is prohibited from receiving fresh deposits;
◦ its licence is cancelled
◦ licence is refused to it by the RBI;
◦ it is wound up either voluntarily or compulsorily;
◦ it ceases to be a banking company or a co-operative bank within the meaning of
Section 36A(2) of the Banking Regulation Act, 1949;
◦ it has transferred all its deposit liabilities to any other institution;
◦ it is amalgamated with any other bank or a scheme of compromise or arrangement or
of reconstruction has been sanctioned by a competent authority and the said scheme
does not permit acceptance of fresh deposits.
In the event of the cancellation of registration of a bank, deposits of the
bank remain covered by the insurance till the date of the cancellation.

22. Liability of DIC to depositors
 If a bank goes into liquidation: The DIC is
liable to pay to each depositor through the
liquidator, the amount of his deposit up to
Rupees one lakh within two months from the
date of receipt of claim list from the liquidator.
 If a bank is reconstructed or amalgamated /
merged with another bank: in respect of an
insured bank the said scheme provides for each
depositor being paid or credited with, an amount
which is less than the original amount the
Corporation shall be liable to pay an amount
equivalent to the difference between the amount
so paid or credited and the original amount

23. Conclusion
 The recent global financial crisis revealed the importance of effective
deposit insurance system as a key element of the global financial
stability framework.
 In response to the crisis that resulted in loss of confidence among the
depositors, a number of authorities increased deposit insurance
coverage levels with some even providing explicit blanket guarantee.
 The role of deposit insurance is undergoing important changes in the
light of the financial crisis, leading to a rethinking of the optimal design
features of the deposit insurance system.
 The close coordination between the bank supervisors, the bank
resolution framework and effective prudential regulation and
supervision of the financial sector can help lower moral hazard and
reduce excessive risk taking by private sector.
 Traditionally, deposit insurance was limited to protecting those unable
to understand or monitor risk in the system and the effectiveness of
deposit insurance was seen as being limited to periods of financial
stability.
 Full creditor guarantees and public support are needed to maintain
financial stability in banking sector and national development.

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