Depositors' claims settled by DICGC rise over 1,500% in pandemic year
All these claims came from cooperative banking sector spread across the country from UP, Maharashtra, Rajasthan to Andhra Pradesh. Maharashtra has the highest share in the claims settlement
- Aug 31, 2021,
- Updated Aug 31, 2021 4:12 PM IST
The Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly-owned subsidiary of the Reserve Bank of India, has settled depositors' claims worth Rs 845 crore in the first pandemic year, which reflects a massive rise of over 1,500 per cent as compared to the last year.
All these claims came from the cooperative banking sector spread across the country from Uttar Pradesh, Maharashtra, Rajasthan to Andhra Pradesh. Maharashtra has the highest share in the claims settlement.
The claim settlement amount is likely to shoot up soon as the government has now cleared the path for settling depositors' claims up to Rs 5 lakh under moratorium cases in 90 days of the RBI's moratorium announcement. In the past, the payment of depositors' claims used to take years.
Take, for instance, the Maharashtra-based Karad Janata Sahakari Bank, which was under the RBI's action since 2017. The DICGC has paid a maximum claim of Rs 329.76 crore to 39,032 depositors. The RBI had cancelled its licence because of inadequate profitability and capital.
In another cooperative bank, CKP Cooperative Bank, where the DICGC paid Rs 250 crore, a concrete revival plan was formed for its merger with a stronger bank. The RBI, which ordered the cancellation of its licence, didn't see any commitment towards revival from the management. The bank was first put under its control in 2014, and placed under operational restrictions in 2019.
While the new regulation to ensure early payment is a depositor-friendly initiative, the cash outgo from the DICGC will increase in the initial years, as the actual restructuring or liquidation process of any bank especially a cooperative bank under a moratorium takes years. In such a scenario, the DICGC will get its money back only after the liquidation process.
The large settlement of claims shows there were not enough liquid funds available with the banks to settle the claims. The liability of DICGC gets triggered if the bank's internal funds are not sufficient to pay the depositors' liabilities.
In the last decade, the cooperative banks are the ones increasingly facing the RBI's moratorium, cancellation of licence, and liquidation proceedings. The reason being poor corporate governance framework, lack of digitisation, and asset-liability mismanagement because of reckless lending.
The government decision to allow fund access to depositors of banks under a moratorium in 90 days is expected to benefit the cooperative banking sector the most as this segment has seen the maximum moratoriums and liquidation in the last decade.
Also read: Budget 2021: Relief for depositors! Now 'time-bound' access to deposits if bank goes bust
Currently, the DICGC provides deposit insurance up to Rs 5 lakh per customer per bank for both principal and interest in savings, current and fixed deposits. The premium of 12 paise per Rs 100 deposit is paid by the banks as a premium to the DICGC on behalf of the depositors.
The corporation covers all kinds of licenced banks, including the cooperative banking sector. The cooperative banking sector comprises centre, state, and primary cooperative banks, including, urban cooperative banks. However, the primary cooperative societies are not insured by the DICGC.
In a recent amendment, the government has taken note of well-run banks subsidising the depositors of badly run cooperative banks. The government has now provided flexibility to the DICGC and the RBI to increase the deposit premium from 12 paise per Rs 100 deposit to any higher amount, based on the risk profile. "There is a case of hiking the premium for the cooperative banking sector," say experts.
So far, as the public and private banks are concerned, there are not many failures as the RBI and the government step in to protect the interest of the depositors. The IDBI Bank, which saw a huge spike in NPAs, was bailed out by the insurance giant LIC. Rana Kapoor founded Yes Bank, which got snowed under corporate NPAs, was bailed out by the public as well as the private sector. More recently, the RBI had found a foreign bank DBS Bank as the suitor for the failed old private sector Laxmi Vilas Bank.
Also read: Parliament clears DICGC (Amendment) Bill, 2021; relief to customers of banks facing RBI curbs
The Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly-owned subsidiary of the Reserve Bank of India, has settled depositors' claims worth Rs 845 crore in the first pandemic year, which reflects a massive rise of over 1,500 per cent as compared to the last year.
All these claims came from the cooperative banking sector spread across the country from Uttar Pradesh, Maharashtra, Rajasthan to Andhra Pradesh. Maharashtra has the highest share in the claims settlement.
The claim settlement amount is likely to shoot up soon as the government has now cleared the path for settling depositors' claims up to Rs 5 lakh under moratorium cases in 90 days of the RBI's moratorium announcement. In the past, the payment of depositors' claims used to take years.
Take, for instance, the Maharashtra-based Karad Janata Sahakari Bank, which was under the RBI's action since 2017. The DICGC has paid a maximum claim of Rs 329.76 crore to 39,032 depositors. The RBI had cancelled its licence because of inadequate profitability and capital.
In another cooperative bank, CKP Cooperative Bank, where the DICGC paid Rs 250 crore, a concrete revival plan was formed for its merger with a stronger bank. The RBI, which ordered the cancellation of its licence, didn't see any commitment towards revival from the management. The bank was first put under its control in 2014, and placed under operational restrictions in 2019.
While the new regulation to ensure early payment is a depositor-friendly initiative, the cash outgo from the DICGC will increase in the initial years, as the actual restructuring or liquidation process of any bank especially a cooperative bank under a moratorium takes years. In such a scenario, the DICGC will get its money back only after the liquidation process.
The large settlement of claims shows there were not enough liquid funds available with the banks to settle the claims. The liability of DICGC gets triggered if the bank's internal funds are not sufficient to pay the depositors' liabilities.
In the last decade, the cooperative banks are the ones increasingly facing the RBI's moratorium, cancellation of licence, and liquidation proceedings. The reason being poor corporate governance framework, lack of digitisation, and asset-liability mismanagement because of reckless lending.
The government decision to allow fund access to depositors of banks under a moratorium in 90 days is expected to benefit the cooperative banking sector the most as this segment has seen the maximum moratoriums and liquidation in the last decade.
Also read: Budget 2021: Relief for depositors! Now 'time-bound' access to deposits if bank goes bust
Currently, the DICGC provides deposit insurance up to Rs 5 lakh per customer per bank for both principal and interest in savings, current and fixed deposits. The premium of 12 paise per Rs 100 deposit is paid by the banks as a premium to the DICGC on behalf of the depositors.
The corporation covers all kinds of licenced banks, including the cooperative banking sector. The cooperative banking sector comprises centre, state, and primary cooperative banks, including, urban cooperative banks. However, the primary cooperative societies are not insured by the DICGC.
In a recent amendment, the government has taken note of well-run banks subsidising the depositors of badly run cooperative banks. The government has now provided flexibility to the DICGC and the RBI to increase the deposit premium from 12 paise per Rs 100 deposit to any higher amount, based on the risk profile. "There is a case of hiking the premium for the cooperative banking sector," say experts.
So far, as the public and private banks are concerned, there are not many failures as the RBI and the government step in to protect the interest of the depositors. The IDBI Bank, which saw a huge spike in NPAs, was bailed out by the insurance giant LIC. Rana Kapoor founded Yes Bank, which got snowed under corporate NPAs, was bailed out by the public as well as the private sector. More recently, the RBI had found a foreign bank DBS Bank as the suitor for the failed old private sector Laxmi Vilas Bank.
Also read: Parliament clears DICGC (Amendment) Bill, 2021; relief to customers of banks facing RBI curbs