The instances of the Reserve Bank of India (RBI) pulling the plug on cooperative banks have risen remarkably in the recent years. And, despite efforts to improve the laws and supervision infrastructure, such actions by the central bank continue to take place. Every bank failure is a shocker for depositors. Banks are the guardians of public money.
The latest such shocker happened over the last weekend. The RBI on June 18 said it was revoking the licence of Millath Co-operative Bank Ltd, Davangere, Karnataka, citing inadequate capital. Consequently, the bank ceases to carry on banking business, with effect from the close of business on June 18, 2022, the RBI said.
But, what was worth noting here was the fact that no single depositor was stuck with his money which is the case usually. According to the central bank’s announcement, as per the data submitted by the bank, all the depositors will receive full amount of their deposits from the Deposit Insurance and Credit Guarantee Corporation (DICGC).
This was a great news. The rule is on liquidation, every depositor would be entitled to receive deposit insurance claim amount of his/her deposits up to a monetary ceiling of Rs 5 lakh from DICGC, subject to provisions of the DICGC Act, 1961. However, in most cases, there will be a section of depositors — few in number but big in terms of amount of money deposited— who will be left waiting for resolution.
This is because their deposits will be well above the permitted limit of Rs 5 lakh.
However, in Millath bank’s case, it appears all deposits fell within the limit, enabling the DICGC compensate full amount to all depositors. In other words, no single depositor is impacted with the closure of the bank. This is probably the only instance in recent years where 100 percent depositors will be getting their money back following a bank closure under the DICGC cover.
At a broader level, this case highlights the pressing need for a higher DICGC cover. Even the Rs 5 lakh is not enough today, considering the increase in appetite for bank deposits as a safe option compared with other asset classes, especially by senior citizens. In the event of a bank failure, there is no assurance for high-value depositors that they will get the refund in a timebound manner. The rising instances of cooperative bank failures highlight the need for a higher safety net for depositors.
According to the government, with the last year amendment in the DICGC Bill, the deposit insurance coverage in India has gone up to 98.3 percent and covered deposit value has risen to 50.9 percent against the comparative numbers globally — 80 percent and 20-30 percent, respectively.
The deposit insurance guarantee scheme was set up in 1961 to ensure depositors are assured of at least some amount in return in the event of a bank collapse. This amount was enhanced to Rs 1 lakh only in 1993 from Rs 30,000. The DICGC enhanced the cover to Rs 1 lakh per depositor in May 1993 for deposits of commercial banks, RRBs, local area banks (LABs) and co-operative banks and the rest of the deposit amount is forfeited in the rare event of a bank failure. A further increase to Rs 5 lakh happened in 2021.
So, what should be the ideal threshold?
There are varying views about the quantum of deposit cover required for Indian banks but there is a general agreement that the cover needs to go up. Often, depositors will have to wait for a long period to get their money back in such cases. But now, even if a bank is placed under moratorium, the customers can get their money back in 90 days. This will help co-operative banks to regain some lost trust. But, here again, the comfort is only for smaller depositors.
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 an adequate guarantee, depositors may move to bigger banks or look for alternative instruments to park their savings. 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. The government shouldn’t let that happen.(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)