Budget 2021: Will PMC Bank, others be able to get depositor’s insurance cover now?

On February 1, as India’s finance minister Nirmala Sitharaman read out her annual Budget (2021) speech, Mumbai-based Rupali Mehta, 48, saw a silver lining in an otherwise dark cloud that she has been living under since September 2019. Back then, the Reserve Bank of India (RBI) had placed restrictions on the Punjab and Maharashtra Cooperative (PMC) Bank and had suspended its board of directors. The restrictions still continue and depositors like Rupali are stuck; many of whom have their entire life savings in their bank accounts. So, what changed?

Budget 2021 announced that depositors whose money is stuck in banks placed under moratorium would now be allowed to access the Deposit Insurance and Credit Guarantee Corporation (DICGC) insurance cover, even if the bank has not yet been liquidated. The amount available per customer under this insurance is Rs 5 lakh. Last year’s Budget had raised this cover-up from Rs 1 lakh that was prevalent up until then. But so far, depositors can only get this money if their bank is liquidated. PMC Bank- and scores of other banks who are still under RBI’s moratorium- still exists, albeit many RBI’s restrictions. They have not yet been liquidated. Which means, their depositors cannot yet access the insurance cover.

Rupali has her savings of Rs 20 lakh stuck in her PMC bank account. She had hoped to use that money to fund her children’s foreign education. “After my money got stuck, I had to apply for a loan. Now, I have to pay interest on my loan,” she said. She is not alone.

Kulvinder Bhatia, 71, another Mumbai-based senior citizen has his 15-year worth of savings stuck in PMC Bank. Now, everything is stuck “Due to withdrawal restrictions, I am totally dependent on my only married daughter for regular monthly and medical expenses,” he said.

Rohan Barve, 38, a businessman residing in Mumbai has deposits worth Rs 50 lakh in the PMC Bank but couldn’t access those funds when his elderly parents were infected with COVID-19 and were hospitalized. The bill came up to Rs 14 lakh. “But, despite having Rs 50 lakh in my PMC bank account, I had to borrow from relatives and friends to settle the hospital bills,” he said.

He could only withdraw Rs 4 lakh from his account on medical grounds.

The question is: whether depositors like Rupali, Kulvinder, and Rohan be able to get access to the DICGC cover of Rs 5 lakh? Would the Budget 2021 proposal on DICGC be implemented retrospectively or prospectively?

As per a Moneycontrol story dated February 4, there are many co-operative banks whose operations are restricted. The story quotes a recent State Bank of India (SBI) analysis that said that 61 percent of the total accounts are less than Rs 1 lakh, around 70 percent are less than Rs 2 lakh, and 98.2 percent are less than Rs 15 lakh. This meant that small depositors are adequately covered in terms of insurance cover. But small depositors constitute a small percentage of the overall deposit base. This means while a majority of depositors in number may get their money back, the remaining is set to lose a big chunk of their savings in the event of a bank collapse.

Also read: 9 co-operative banks currently under RBI directions like PMC Bank

The sufferings of Punjab and Maharashtra Cooperative (PMC) Bank, Yes Bank, and Lakshmi Vilas Bank customers are fresh in people’s memory. Several depositors experienced hardship during the pandemic time due to withdrawal restrictions imposed by the central bank on these stressed banks.

“These are definitely welcome moves. The DICGC insurance, in spite of being there, was not really effective as depositors' money got stuck. The flexibility to withdraw, subject to terms and conditions if any, would be helpful for depositors,” says Joydeep Sen, corporate trainer (debt markets) and author. Sen reminds that the restrictions have kept getting extended for some stressed banks on every review date from the RBI.

For instance, the 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, 2021, the RBI once more extended the directions to April 31, 2021, and this will be subject to review again. The restriction on PMC bank also continues until March 31, 2021.

Anil Patwardhan, Senior Director-Ratings of Brickwork Ratings says that the new rule would benefit many depositors and “will instill investor trust in the banking industry.”

But, the bigger concern is whether the amendment in DICGC act will be applicable retrospectively or not? Moneycontrol had reached out to DICGC to get further information on it but there was no response until this story got into print.

A retail banker requesting anonymity says that we have to wait for further clarifications, although he says that logically it should be applicable to current cases as well since the DICGC rule announcement in Budget 2021 was largely said to have been driven by PMC bank customers’ sufferings.

“It is expected that the modifications to the DICGC Act would be applicable retrospectively and that it would be possible for depositors to withdraw funds of up to Rs five lakh even if the bank is currently under stress. However, we will get to know the exact implications only when the amendments are made,” says Adhil Shetty, CEO of BankBazaar.com. He adds procedures or directives to claim the amount from the stressed banks that will come out at a later stage from the RBI.

It’s always better to diversify your risks and savings across multiple bank accounts. But don’t hold too many bank accounts, either.