The crisis at a cooperative bank has thrown attention on the need to increase the deposit insurance limit and explore a risk-based premium model for the deposit insurance fund.
As the Reserve Bank of India (RBI) sets curbs on New India Co-operative Bank, the depositors have a safety net in the Deposit Insurance and Credit Guarantee Corporation (DICGC) as depositors can get up to ₹5 lakh by making a claim to DICGC.
Analysis of DICGC’s annual report shows that claims settled by the organisation almost doubled year-on-year to ₹1,436 crore in FY24 and the entire amount relates to claims paid toward cooperative banks. The previous high of ₹8,516 crore in claims settlement was in FY22 because the pandemic caused significant stress to this segment of banks.
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According to the law, when banks are placed under AID (All Inclusive Directions) by RBI, the DICGC is required to settle the deposit insurance claims of the depositors within a maximum of 90 days from the date of AID imposition. DICGC has been able to settle claims at an average of 45 days in the last three fiscal years, as per data.
Given that the premium paid by insured banks to DICGC is a flat rate of 12 paise of every Rs 100 of assessable deposits, the share of premium received from cooperative banks is meagre compared to other categories of banks and is also declining. Cooperative banks held 6.7 per cent share of the total premium received by DICGC in FY21 and this has come down to 5.6 per cent in FY24.
Speaking at a recent DICGC event, RBI Deputy Governor M Rajeshwar Rao said that “a periodical upward revision” of the insurance limit is warranted given the growth in the value of bank deposits. He also said authorities must explore a “risk based premium” model for deposit insurance to ensure robustness of its finances.
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Cooperative banks are a lifeline for lower and middle-income individuals, and hold roughly 6-7 per cent of the total bank deposits. As of March 2024, there are 1,997 banks insured with the DICGC, of which 1,857 are cooperative banks.
As per data filed with the Parliament, the licences of 78 Urban Cooperative Banks (UCBs) have been cancelled by RBI since 2014. In calendar year 2024 alone (till July), licenses of 10 UCBs were cancelled.