DICGC Overcharging Commercial Banks | 03 Sep 2024

Source: LM

Why in News?

The Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the Reserve Bank of India (RBI) is under scrutiny for its premium structure, which appears to overcharge commercial banks while disproportionately benefiting cooperative banks.  

• This raises concerns about the fairness and efficiency of the current system, prompting calls for a reevaluation of premiums based on the risk profiles of different banking institutions.  

How are the Commercial Banks Being Overcharged for Deposit Insurance? 

• Disproportionate Premium Burden: DICGC collects 94% of premiums from commercial banks, which account for 1.3% of net claims, while cooperative banks contribute 6% of premiums and claim 98.7% of net claims. 
  • Since 1962, commercial banks have filed gross claims of Rs 295.85 crore, with net claims totaling Rs 138.31 crore.  
    • In contrast, cooperative banks have filed gross claims of Rs 14,735.25 crore, with net claims amounting to Rs 10,133 crore. 
  • This means that well-managed commercial banks are effectively subsidising the higher risks associated with cooperative banks, which require a significant portion of claims. 
• Implications for Overcharging Commercial Banks: 
  • High Compliance Costs: The uniform premium rate of 12 paise per Rs 100 insured, regardless of risk profile, imposes high compliance costs on commercial banks which can affect their operational efficiency and profitability, ultimately impacting their ability to lend and serve customers effectively. 
  • Inequitable Risk Assessment: Commercial banks, which generally have lower risk profiles, are penalised through higher premiums, undermining the principles of risk evaluation that should guide insurance pricing. 
  • Impact on Financial Stability: The high premiums can lead to reduced financial stability for commercial banks, as they may need to pass on these costs to depositors and borrowers.  
    • This could result in higher interest rates for loans and lower returns for depositors, affecting the overall banking ecosystem. 
  • Encouragement of Poor Management Practices: By requiring commercial banks to bear the costs associated with cooperative bank failures, the current structure may inadvertently encourage poor management practices within cooperative banks, as the consequences of defaults are shifted to more stable institutions. 

What are the Key Facts About DICGC? 

• About: 
  • It came into existence in 1978 after the merger of Deposit Insurance Corporation (DIC) and Credit Guarantee Corporation of India Ltd. (CGCI) after passing of the Deposit Insurance and Credit Guarantee Corporation Act, 1961 by the Parliament. 
  • It serves as a deposit insurance and credit guarantee for banks in India. 
  • It is a fully owned subsidiary of and is governed by the Reserve Bank of India (RBI). 
• Funds Managed by DICGC: 
  • Deposit Insurance Fund: Provides insurance to bank depositors in case the bank fails financially and has no money to pay its depositors and has to go in for liquidation. 
    • It is funded by premiums from banks. 
  • Credit Guarantee Fund: It is the guarantee that often provides for a specific remedy to the creditor if his debtor does not return his debt. 
  • General Fund: It covers DICGC's operational expenses, funded by surplus from its operations. 

What is the Deposit Insurance Scheme of DICGC? 

• Limit for Deposit Insurance: Currently, a depositor has a claim to a maximum of Rs 5 lakh per account as insurance cover. This amount is termed ‘deposit insurance’. The cover of Rs 5 lakh per depositor is provided by the DICGC. 
  • Depositors having more than Rs 5 lakh in their account have no legal recourse to recover funds in case a bank collapses. 
  • Premium for the insurance has been raised from 10 paise for every Rs 100 deposit, to 12 paise and a limit of 15 paise has been imposed. 
    • The premium for this insurance is paid by banks to the DICGC, and not be passed on to depositors. 
    • The Insured banks pay advance insurance premiums to the corporation semi-annually within 2 months from the beginning of each financial half year, based on their deposits as at the end of previous half year. 
• Coverage: 
  • Banks, including regional rural banks, local area banks, foreign banks with branches in India, and cooperative banks, are mandated to take deposit insurance cover with the DICGC. 
    • Primary cooperative societies are not insured by the DICGC. 
• Types of Deposits Covered: DICGC insures all bank deposits, such as saving, fixed, current, recurring, etc. except the following types of deposits. 
  • Deposits of foreign Governments. 
  • Deposits of Central/State Governments. 
  • Inter-bank deposits. 
  • Deposits of the State Land Development Banks with the State co-operative banks. 
  • Any amount due on account of any deposit received outside India. 
  • Any amount which has been specifically exempted by the corporation with the previous approval of the RBI. 
• Need of Deposit Insurance: 
  • Troubles for depositors in getting immediate access to their funds in banks in recent cases such as Punjab & Maharashtra Co-operative (PMC) Bank, Yes Bank and Lakshmi Vilas Bank had put spotlight on the subject of deposit insurance. 

Why is there Need to Reevaluate Deposit Insurance Premiums by DICGC? 

• Proposal: There has been a proposal to reduce the premium for commercial banks from 12 paise to 3 paise per Rs 100 insured, which could relieve these banks of approximately Rs 20,000 crore in FY26.  
  • Conversely, premiums for cooperative banks could remain at 12 paise or increase to 15 paise. 
• Benefits:
  • Risk-Based Premiums: Aligning premiums with the risk profiles of banks sends a clear message that insurance costs should reflect actual risk. 
  • Economic Efficiency: Lower compliance costs for commercial banks can enhance their operational efficiency, benefiting depositors and borrowers. 
  • Encouraging Good Management: By not penalising well-managed banks, the system promotes better banking practices.