Based on the illustrious keynote address given by Mr. Michael Debabrata Patra, Deputy Governor, Reserve Bank of India – June 14, 2024 – at the 79th Executive Committee Meeting of the International Association of Deposit Insurers (IADI) at Rome, Italy, the following article traces the evolution of Deposit Insurance and Credit Guarantee Corporation, now known as DICGC, the backbone of the safety of the common man’s hard-earned deposits in banks. This article delves into the evolution of the DICGC, its current role, and the insights shared by Mr. Michael Debabrata Patra, Deputy Governor of the RBI, at the 79th Executive Committee Meeting of the International Association of Deposit Insurers (IADI) held in Rome, Italy, on June 14, 2024.
Let us look at the glorious history of DICGC.
What is DICGC?
The idea of deposit insurance was shaped by intermittent bank failures between 1948 and 1960. A Deposit Insurance Act was promulgated by Parliament in 1961 to set up the Deposit Insurance Corporation (DIC), a wholly owned subsidiary of the Reserve Bank of India (RBI), the country’s central bank. It was merged with the Credit Guarantee Corporation of India and renamed as the Deposit Insurance and Credit Guarantee Corporation (DICGC) on July 15, 1978 with the mandate of “insurance of deposits and guaranteeing of credit facilities and for other matters connected therewith or incidental thereto”.
The function as credit facilities being guaranteed for priority sector advances in those days when it was in operation, DICGC no longer undertakes this function.
Having relinquished this function in 2003, DICGC just crowns itself with the insurance of deposits only.
Exactly what does DICGC undertake as its primal function?
Enabled with the recent amendments in DICGC act in 2021, it is now able to make payments to the depositors of banks facing solvency stress up to the insurance limit within 90 days of the stressed banks being placed regulatory directions which prohibit the said banks from discharging their duties.
The first 45 days are available for the stressed banks to give the list of its depositors to DICGC, next 30 days enable the corporation to verify the genuineness of the claims, and make the payments in the next 15 days, if the depositors show their agreements to receive the payments. In case of amalgamation or arrangements /reconstruction of the said banks, the time duration gets extended by another 45 days more.
Interestingly, what is the exact coverage of the deposits and does not compare with the global standards?
It is apposite at this discussion to give some exact figures.
Some facts from the speech of the distinguished speaker.
“In India, deposit insurance is mandatory for all banks, including foreign banks. Currently, 1,997 banks are covered, comprising 140 commercial banks and 1,857 cooperative banks, which are small financial institutions owned and controlled by their members and are community-focused in their operations.
According to the IADI’s latest deposit insurance survey7, this is the largest number of deposit-taking institutions covered by deposit insurance in the world, second only to the US.
The current insurance coverage limit is INR 500,000 (approximately US$ 6000) per depositor in a bank. Expressed as a multiple of nominal GDP per capita, this works out to 2.9 times as against the global median of 3.3, but it compares favourably with medians for paybox and risk minimiser DIs.
On a by-account basis, the coverage ratio in India at 97.9 per cent is in line with the global median and a little below the latter – 44.2 per cent as against 47 per cent globally – in terms of value of deposits.”
Or in simple terms, the depositor gets a total of INR of 500,000 or Rs.5 lacs or US $6,000.
Funding of the insurance corporation
Yes, in tune with global standards, DICGC is funded by the premiums paid by the member institutions which get the benefits from the corporation. ((64 per cent of pre-tax accretion to the fund). In addition, about 35 per cent of the accretion to the deposit insurance fund (DIF) came from investment income in fiscal 2022-2023.)
Unlike the growing practice worldwide of nearly half of deposit insurers levying differential premiums incorporating additional risk measures – up from 30 per cent in 2010 – a flat rate premium of 0.12 per cent per annum is levied in India which has been revised from time to time, keeping in view the adequacy of the Corporation’s DIF. (DIF – Deposit Insurance Fund).
The size of the fund, measured by its ratio to insured deposits, at 2.02 per cent is comparable with the global median.
The Corporation has targeted the achievement of a ratio of 2.5 per cent by March 2028 which it will achieve by all means.
Do you know that 96% of global Dis get funded by levying premiums on member institutions?
Why so much emphasis on DICGC now, that too on a global scale?
Coupled with the March 2023 turmoil in banking, the deposit insurance processes got fine-tuned.
DICGC got updating of risk management particularly to face adverse market conditions which may arise any time.
How did it undertake this mammoth task?
This necessitated revamping risk management and internal control systems, including contingency planning and crisis management frameworks in tune with the IADI’s Guidance Paper on “Risk Management and Internal Control System of Deposit Insurers (DIs)”.
Updated asset-liability management tools, real time monitoring of liquidity and concentration ratios, and periodic value-at-risk and scenario analyses at various confidence levels are now used to manage DICGC’s portfolio valued at a huge sum of US $24.5 billion. Obviously, these sophisticated treasury operations are order of the day.
It was stated by the distinguished speaker that some risk management measures like market borrowing, liquidity support from central bank/government, etc., would necessitate changes in statutory provisions. Indian government as well as RBI are always in a mood to face the uncertain future risks with the current market reforms including the required statutory changes.
Let us learn the steps being taken by DICGC to disseminate the knowledge about coverage being given to depositors’ accounts. Some of the steps are:
- Public awareness campaigns at various levels with refashioned steps to attract the upcoming younger generations, a huge rural population which have seen upheaval in their relationship with the banks, and vast number of agriculturists who use banks for saving, and other activities.
- All insured banks are required to display the DICGC Logo and QR code linked with the DICGC’s website on their own websites and internet banking portals. This was never emphasized at bank’s levels.
- The Corporation has also registered on a hyper-local social platform which facilitates sharing of specific information on claim payments.
- Messages are also relayed by structured mobile phone text.
- The website itself is being overhauled/closely monitored to make it more customer-friendly in terms of search capability, information architecture, improved user interface/experience, content strategy and user engagement, a progressive Web App and the like.
- Simple usage of words clearly explaining the meaning of insurance cover, how it operates under the stressed banks which covered a large number of cooperative banks causing huge financial difficulties to the loyal deposit customers. (During the course of the conclusion of this article, I intend explaining the recent unfortunate instances in Indian banking which caused enormous difficulties to women, senior citizens, small traders, and all types of small customers who totally believed in banks working in semi urban/rural areas)
What steps are being taken with the digital push of the nations in insurance cover of the Corporation?
The distinguished speaker spoke about the following measures.
Digital transformation of all operations had been undertaken with a focus on data management, process optimisation, business analytics and cyber security with best-in-class market technologies.
Straight through processing without manual intervention and seamless integration of various modules had been on the anvil alongside use of application programming interfaces (APIs), and artificial intelligence.
A standalone single customer view application (SCVA) would reduce time lags in the submission of claims. An in-house recovery dashboard enables tracking compliances, and authentication of asset details and payments by liquidators.
The conclusion of the speech touched a totally interesting area of insurance totally unheard in the recent past.
Let me explain this vital area if you could not guess it correctly.
Heightened uncertainty like climate change would emerge as an overarching risk to the global economy and the financial systems.
Why so?
According to the IADI’s surveys, 60 per cent of DIs have formalised Environmental, Social, and Governance (ESG) policies and some are members of the Network for Greening the Financial System (NGFS).
Framing a comprehensive ESG policy incorporating elements of climate sustainability, investment in sovereign green bonds, measuring the impact of climate change on default risk and contingency planning for climate related extreme events via actuarial analysis would enable our national institutions to face the challenges boldly.
The Participants on the global scale were informed about exploring appropriate coverage for green deposits, climate risk based differential premiums and ex ante funding needs for climate sustainability.
Naturally, an optimistic view was expressed that these new challenges would essentially require effective coordination and information sharing between DIs and other national safety net participants as well as with those in other jurisdictions and that forums like this one shall be the incubators of global coordination.
My observations on the above speech delivered to global audience
Continuous collapse of various financial institutions, some of them being termed as too big to fail necessitating the timely intervention of all countries including India, enabled this global attempt to unite all Dis on a global scale to come together, analyse the current situation, offer cooperation among nations, and facilitate an optimism in the minds of depositors of all hue.
Frequent failure of small banks on a large-scale all-over India witnessed pathetic scenes of seniors losing huge deposits to bank cheats, complete failure of the normal warm feelings created by small credit institutions which actually serve the poorest of the poor in rural areas. A large number of women entrepreneurs or even students saving for future were affected by the gloomy situations created by bank failures.
At this juncture, the role of DICGC came to the attention of small depositors by its timely attempt to disburse the funds. Never one believed that a common man will understand the simple truth that every depositor is covered up to Rs 5 lacs. It is also heartening to know from the latest digital steps taken to update the treasury operations of the august DICGC.
Monetary caution
I just expressed my views based on the speech given by our illustrious Deputy Governor of RBI. You can easily read his speech in original from RBI website and form your own judgements. No advice or consultation has been given in above article.
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