Analysis | Why not all cooperative bank depositors are happy with the Rs 5 lakh insurance cover

#DICGC, said , Union Budget, was informed on September 20.

PMC bank put under direction by RBI.

On September 21, the Deposit Insurance Credit Guarantee Corporation (DICGC) said it will pay account holders of banks placed under curbs – including a cap on withdrawals – an amount equivalent to their outstanding deposits up to a maximum of Rs 5 lakh within 90 days.

The announcement should have brought cheer to all customers of such banks, including two scam-hit ones among 21 insured lenders. The DICGC’s promise of payment in 90 days will ensure that customers of lenders and cooperative banks placed under restrictions for alleged wrongdoing get their money in a time-bound manner.

However, there’s a catch – the benefit is meant only for those with deposits of up to Rs 5 lakh. What about other depositors? In most cases, the number of depositors with deposits exceeding Rs 5 lakh will likely be small, but in terms of value, the amount could be significant.

There is no separate data available on the quantum of deposits above Rs 5 lakh in cooperative banks. Officials estimate this chunk will be sizeable in terms of value because many retired people deposit their money in cooperative banks, expecting better returns.

“This can be a major reason for worry, especially for retirees who have significantly higher savings in banks,” said Naresh Malhotra, a senior banker formerly with the State Bank of India. “This segment typically does not prefer to park money in volatile equities or illiquid real estate. For them, the Rs 5 lakh limit does not offer any relief.”

Retired people typically have funds of Rs 30 lakh and above, Malhotra explained. The figure could be higher for senior-level employees or those with income from multiple sources including the sale of assets. In the event of a bank failure, there is no assurance that high-value depositors will get refunds in a time bound manner.

Parliament passed the Deposit Insurance and Credit Guarantee Corporation (Amendment) Bill, 2021, in the monsoon session and the act was notified on August 27.

Wider cover

According to the government, with the latest amendment, deposit insurance coverage in India has gone up to 98.3 percent and the deposit value covered has risen to 50.9 percent against global levels of 80 percent and 20-30 percent, respectively.

However, these numbers may include Jan Dhan accounts, which are large in number but typically do not have high-value deposits. There were over 430 million Jan Dhan beneficiaries as of August 4, which together had Rs 1.43 lakh crore of deposits, according to official statistics.

The plan to increase the deposit cover was first announced in the 2020 Union Budget. DICGC collects premiums from banks to offer the cover. In the event of a bank collapse, DICGC compensates customers by providing the agreed amount.

The deposit insurance guarantee scheme was started in 1961 to ensure that depositors are guaranteed at least some amount in the event of a bank collapse. This amount was enhanced to Rs 1 lakh in 1993 from Rs 30,000.

The enhanced cover was for deposits in commercial banks, regional rural banks, local area banks and cooperative banks. Amounts beyond the cover would be forfeited in the rare event of a bank failure.

Ideal threshold

There are varying views about the quantum of deposit cover required for Indian banks. An SBI research report in October 2019 called for a minimum Rs 2 lakh deposit insurance cover for term depositors, Rs 1 lakh for savings bank depositors and a separate threshold for senior citizens.

“Higher deposit insurance cover will be a confidence-building factor for small depositors,” said Malhotra. “Earlier, there was no assurance what would happen if a bank went into a crisis or was put under moratorium. There is some comfort now. The bigger depositors will still be worried.”

In recent years, the Reserve Bank of India’s clampdown on cooperative banks has emerged as a worrying factor for depositors. So far this year, the RBI has issued over 100 directives imposing business restrictions on cooperative banks.

This year, the regulator continued the clampdown that it kicked off in 2020 and cancelled the licences of three cooperative banks, launching a major crackdown on wrongdoers and learning from the mistakes of the past.

The RBI cancelled the licences of Shivajirao Bhosale Sahakari Bank on May 31, Bhagyodaya Friends Urban Cooperative Bank on April 22 and Vasantdada Nagari Sahakari Bank on January 11. The punitive measures included imposition of monetary penalties and restrictions on business activities.

The numbers are almost a repetition of what the RBI did in 2020 when the central bank issued 106 directives to cooperative banks either restricting their business operations or extending the period of existing directions.

Last year, it cancelled three permits – Karad Janata Sahakari Bank, CKP Cooperative Bank and Mapusa Urban Cooperative Bank of Goa.

Alternative instruments

Depositors of banks placed under restrictions often had to wait for long periods to access the money in their accounts. But now, even if a bank is placed under a moratorium, its customers can get their money in 90 days. This will help cooperative banks to regain some lost trust. But, here again, the comfort is only for smaller depositors.

Take the case of Punjab and Maharashtra Cooperative Bank. It has a number of depositors with deposits way higher than the threshold.

The RBI took over the board of Maharashtra-based PMC Bank in September 2019 after it noticed major financial irregularities. Resolution efforts are still on.

In the case of Karnataka-based Sri Gururaghvendra Sahakara Bank Niyamitha, an audit revealed that Rs 1,480 crore had been siphoned and about Rs 890 crore, or 60 percent, was given as loans to 24 accounts, the Karnataka assembly was informed on September 20.

The rising trust deficit in the banking system can be addressed only if all depositors get insurance cover equivalent to the money they parked in banks. In the absence of a guarantee, depositors may move to bigger banks or look for alternative instruments, said Malhotra.

“Government banks offer some comfort. But the larger point is unless all categories of bank depositors are assured about the safety of the money, there is a possibility of people moving money out of the bank and to other safer instruments,” he said.

(This is an updated version of an earlier piece published on Moneycontrol.)

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