Recently, the social media was in for a shock when an image bearing a stamp of deposit insurance on an HDFC Bank passbook went viral, triggering panic among customers. The message over the stamp read: "The deposits of the bank are insured with DICGC and in case of liquidation of the bank, the DICGC is liable to pay each of the depositors through the liquidator. The amount of this deposit is up to Rs 1 lakh within 2 months from the date of claim list from the liquidator." HDFC Bank is one of the too-big-to-fail banks in India. Was the message fake? HDFC Bank clarified that the message was not fake.
Realization dawned that each bank account holder of any bank will get only up to Rs 1 lakh if their bank goes bust. Thus, the interest on two words 'deposit insurance' has increased sharply in recent times. Google search results show how in just a month searching information about 'deposit insurance' has nearly tripled. The ugly truth is that very few depositors in India knew that each depositor in a bank is insured up to a maximum of Rs 1 lakh if a bank collapses or its licence is cancelled by the RBI.
Depositors are well aware of what it means when a bank is in trouble. The PMC Bank case is an example where thousands of depositors remain in the lurch after the RBI imposed caps on withdrawal limits. On October 19, the ongoing PMC Bank crisis claimed its fifth victim in a week when a 73-year old woman died of heart attack. She was worried about her family's future as her daughter and son-in-law had deposits worth Rs 2.5 crore in the scam-hit bank.
What if you had more than Rs 1 lakh in bank deposits like the 73-year old woman's family? Under the current norms, you get just Rs 1 lakh and there is no guarantee on the excess amount. India has over Rs 127 lakh crore in bank deposits, but only a small portion of that money is insured. Over the years, the level of insured deposits as a percentage of assessable deposits has declined from a high of 75% in 1981-82 to 28% in 2017-18. This leaves a room for the depositor to lose his or her hard-earned money and so-called safe investment in banks. If a catastrophe were to strike and banks were on their knees, the fate of a huge portion of the deposits is unclear.
Today, many depositors are worried about the safety of their deposits. They ask why HDFC Bank is informing depositors about the Rs 1 lakh deposit insurance? Banks are merely complying with an RBI circular dated June 22, 2017, which mandated all banks to inform their customers about the deposit insurance cover. How is your Rs 10 lakh bank FDs safe if only Rs 1 lakh is insured per depositor? The truth is the rest of Rs 9 lakh is not safe if your bank goes bust. This is why there is an urgent need for all depositors and general public to put pressure and force the authorities to hike the deposit insurance cover limit to at least Rs 5 lakh or more. Also, depositors must understand the concept of deposit insurance and its practice in India.
Know how deposit insurance works
Before demanding the limit for deposit insurance be hiked, you should understand the basic of how deposit insurance works. The Indian government has constituted Deposit Insurance and Credit Guarantee Corporation (DICGC) under the RBI to protect customers' interest if a bank fails or collapses. All commercial banks, including branches of foreign banks functioning in India, local area banks, regional rural banks and cooperative banks are insured by the DICGC. As per SBI Research, at the end of FY19, the number of registered insured banks stood at 2098, comprising 157 commercial banks and 1941 cooperative banks. What does DICGC insure? The DICGC insures all deposits such as savings, fixed, current, recurring, etc. The insurance premium is paid by the insured bank, and not the depositors. The insurance premium is 10 paise for Rs 100 worth deposits insured.
Each depositor in a bank is insured up to a maximum of Rs 1 lakh for both principal and interest amount held by him/her in the same right and same capacity as on the date of liquidation/cancellation of bank's licence or the date on which the scheme of amalgamation/merger/reconstruction comes into force. What is somebody has Rs 1 lakh each in different branches of the same bank, say in Mumbai, Hyderabad, Chennai, Kolkata, Delhi or different branches in the same city? Unfortunately, the deposits kept in different branches of a bank are aggregated for the purpose of insurance cover and a maximum amount up to Rs 1 lakh is paid.
As a depositor, you must understand under what the conditions the full Rs 1 lakh amount will be paid. For example, if an individual had an account with a principal amount of Rs 95,000 plus accrued interest of Rs 4,000, the total amount insured by the DICGC would be Rs 99,000. If, however, the principal amount in that account was Rs 1 lakh, the accrued interest would not be insured, not because it was interest but because that was the amount over the insurance limit, DICGC says.
Can you get more than Rs 1 lakh deposit coverage if you keep more than Rs 1 lakh across different banks? If you have deposits with more than one bank, deposit insurance coverage limit is applied separately to the deposits in each bank. For instance, if you keep Rs 1 lakh in Punjab National Bank, Rs 1 lakh in Yes Bank and Rs 1 lakh in Citibank, the applicable deposit insurance cover in this case will be Rs 3 lakh because the money is kept by the depositor in different banks. But, all of us know the practical difficulties of keeping many Rs 1 lakh deposits in different banks.
When is the DICGC liable to pay? If a bank goes into liquidation, the DICGC is liable to pay to each depositor through the liquidator, the amount of his deposit up to Rs 1 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, then the DICGC pays the bank concerned, 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 received by him under the reconstruction / amalgamation scheme within two months from the date of receipt of claim list from the transferee bank / chief executive officer of the insured bank/transferee bank.
Does the DICGC directly deal with the depositors of failed banks? No. In the event of a bank's liquidation, the liquidator prepares depositor wise claim list and sends it to the DICGC for scrutiny and payment. The DICGC pays the money to the liquidator who is liable to pay to the depositors. In case of amalgamation / merger of banks, the amount due to each depositor is paid to the transferee bank.
When can a depositor expect to get the insured amount of up to Rs 1 lakh? History is replete with hard evidence that depositors in troubled Indian banks often have to be patient for many years before they get the deposit insurance money. This timeline is different from the rulebook's 5-month envisaged window. Often, the claim settlement process often runs into roadblocks at the liquidators’ end and thus the depositors get their insurance money years down the line.
Global experience and lessons
As per SBI Research data, deposit insurance coverage in India is one of the lowest at Rs 1 lakh / $1508 / 0.9 times India’s per capital income. If we compare India with Brazil and Russia, the comparative insurance figure rises to Rs 42 lakh and Rs 12 lakh respectively!
If we compare the deposit insurance limit in India with countries having similar per capita income, we find that the insurance cover is even unlimited in some countries. An analysis of deposit base of banking system shows two divergent trends.
In terms of the number of accounts, 61% of the total accounts are less than Rs 1 lakh, around 70% are less than Rs 2 lakh, and 98.2% are less than Rs 15 lakh. So clearly, it seems on paper that the number of small depositors are adequately covered in terms of insurance cover. However, in terms of quantum of deposits, we observe that percentage of deposits less than Rs 1 lakh is only 7.8% of the deposit base. 20.4% of the deposits are contributed by customers having deposits of more than Rs 15 lakh but less than Rs 1 crore with average deposits of Rs 35 lakh. As per SBI Research, the customers (with balance between Rs 15 lakh and Rs 1 crore) get protection only to the extent of 2.8% of their deposits though the premium is paid on the entire value of deposits held by them.
The Reserve Bank of India appears to be considering hiking the deposit insurance limit. As per media reports, the RBI has told DICGC to create a risk-based system for collecting premiums from banks to cover the deposit insurance of customers. The RBI feels that a move to charge banks, depending upon how risky they are, is a pre-requisite for hiking the bank deposit insurance limit of customers from Rs 1 lakh at present.
The Rs 1 lakh deposit insurance limit has not been changed since 1993 i.e. 26 years. It is about time there is a change. The DICGC coverage can be bifurcated into two categories. One, desirable coverage of at least Rs 1 lakh for all savings bank deposits (around 90% of the total accounts). Two, desirable coverage of at least Rs 2-5lakh for term deposits (around 70% of the total accounts). Senior citizen bank depositors should demand a separate provision. Senior citizens and retired people (from the private sector) really have no social security to rely on. They mostly keep fixed deposits for earning interest income which in many cases becomes a part of their current income.
In 2017, the Indian government introduced “The Financial Resolution and Deposit Insurance (FRDI) Bill” in the Parliament but withdrew it in 2018 due to the bail-in clause and mass protests across the country. The FRDI Bill contemplated a mechanism of deposit insurance up to a specified limit (at least Rs 1 lakh) for not only banks but also for the NBFCs, insurance companies, pension funds, stock exchanges, and depositories. However, the FRDI Bill also talked about how a bank in distress can use depositors' funds through a controversial “bail-in” clause.
The time is right for the Indian government to again promulgate the FRDI Bill without the “bail-in” clause. The use of "bail-in" clause should be avoided in the Indian case and the FRDI Bill should increase the deposit insurance cover by a large amount. (The writer is a journalist with 14 years of experience)