Budget 2020: Not all account holders gain from a higher deposit cover

The sufferings of Punjab and Maharashtra Cooperative (PMC) Bank’s customers are fresh in people’s memory. After the bank’s operations were suspended and deposit withdrawals restricted, the talk around increasing deposit insurance thresholds gained momentum.

Now, there is good news for bank depositors and savers. Finance minister Nirmala Sitharaman announced in her Budget speech last week that the government will increase the bank deposit insurance coverage to Rs 5 lakh per depositor, from Rs 1 lakh at present.

This increase would result in deposits (fixed deposits as well saving accounts) of up to Rs 5 lakh being covered by the deposit insurance scheme for banks. This cover is provided by the Deposit Insurance and Credit Guarantee Corporation (DICGC).

Would depositors benefit?

The DICGC is liable to pay every depositor, through the liquidator, when a bank fails. The key aspect to understand here is ‘liquidation.’ As Joydeep Sen, Independent Financial Advisor of wiseinvestor.in points out, “There have been no instances recently, wherein a bank has been liquidated and depositors have got the deposit amount from the DICGC. The directions have kept getting extended on every review date.”

For instance, the Reserve Bank of India (RBI) issued directions to the Kapol Co-operative Bank from the close of business on March 30, 2017 and has been directing the bank ever since to keep the operations suspended. On January 29, 2020, the RBI once more extended the directions to July 31, 2020 and this will be subject to review again.

There are other co-operative banks that have been under RBI directions for quite a few years and it keeps getting extended after review of their financials. These include the likes of CKP Co-operative Bank since May 2012. In fact, PMC bank also runs under RBI’s directives to keep its operations suspended. At the moment, depositors can withdraw Rs 50,000 from their accounts and another Rs 50,000 in case of hardships such as medical treatment, marriage in the household and so on. Experts say that RBI typically does not prefer the course of a bank directly heading to liquidation, especially if it is a large commercial bank. The focus of the central bank is generally to revive the financials and operations and then send a bank into liquidation and pay depositors under DICGC. So far, the only pay-outs under this scheme have happened for the benefit co-operative banks’ customers. The pay-out from DICGC has never gone on to benefit any commercial bank’s customers, simply because no commercial bank in India has ever been liquidated. “But, the cost of premium is borne by the entire financial sector because all banks, including commercial banks, have to pay the premium towards their individual DICGC cover. The onus of paying insurance premium is on the bank,” says Sen.

Harsh Roongta, a Mumbai-based registered investment advisor says, “The DICGC scheme is the most impractical scheme. What is the point of an insurance scheme wherein depositors have to wait for years after the event has happened for their own money?”

Also, the insurance cover hike will apply to existing account holders as well and not just to newly-opened deposits.