A farmer went to the bank for a loan. He met the manager and requested for the loan. Manager asked him” why you want a loan?” for my child’s higher education” answered the farmer. Manager given him a list of documents and securities he needs to furnish to his bank’s satisfaction for the loan. Manager explained him that these are required because the bank want guarantee that the repayment will happen in time.
Farmer arranged all documents, bank sanctioned his loan. The tenure of the loan was 5 years but just after 5 months the farmer turned back and repaid in full. The manager was surprised asked him, “how can you pay this fast?” “the crop was good as the rates” was the answer from farmer. When the farmer was leaving after payment, the manager went to him and asked, “can you deposit some amount with us as FD, we pay 7% per annum” the farmer shot him back with a counter question” what are the security you are ready to give for deposit” he explained if the bank fails? Cartoon I read somewhere, but coming back to mind repeatedly. Investors are worried, whether their bank will survive? Or give a nightmare! After Jandhan Yojana and mandatory banking, most of the people have account with bank and people started depositing their money in those accounts and started using electronic banking. There come the news scams in Punjab National Bank, King Fisher fall out, real estate problems affecting the banks and so on. Investors were confident that let anything happen their money is safe as the banks are under Reserve Bank of India regulations. But on September last week 2019, the news of one of the largest cooperative bank failures broken out, Punjab and Maharashtra cooperative bank, failed. On 24th September, RBI limited the maximum amount which can be withdrawn from an account to 1000 rupees, then increased to 10000 and then 25000. Then the newspapers carried news that the maximum amount which can be expected from the bank if it is failed is just One lakh rupee. Investors were confused and worried, what is going to happen on their deposits.
Many questions came into their minds
Are they going to lose their money?
There is no government or RBI guarantee!
What they need to do now? Etc.… The reality is that either the RBI or Government is not guaranteeing any payment from a bank if it fails. Every bank is an independent business unit and if they fail the government cannot take that responsibility. But there is a great need to safeguard the interests of investors if a bank fails. To increase the confidence level of investors as well safeguard the interests and deposits of the public, in the event when a company fails, Centre has set up Deposit Insurance and Credit Guarantee Corporation. This particular deposit insurance is mandatory for all banks and no bank can withdraw from it. It is worth noting here that the DICGC safeguard the interests of ordinary investors to a great extent as majority of investors are small investors.
Let us try to understand how DICGC deposit insurance work for the benefit of depositors. DICGC is an organisation under RBI to protect depositor if a bank fails. It is an insurance plan where the premium will be paid by the bank for coverage. All banks are mandatorily required to be under this and cannot withdraw from it.
DICGC coverage It covers all commercial and cooperative banks, except in Meghalaya, Chandigarh, Lakshadweep and Dadra and Nagar Haveli. Primary cooperative societies are not insured by DICGC. It covers all types of bank deposits like savings, fixed, current, recurring etc. payable in India. It does not cover the following
Deposits of foreign governments.
Deposits of state or central government.
Deposits of state land development bank with State cooperative banks.
Any amount due on account of any deposit received outside India.
Any amount specifically exempted by the DICGC with previous approval of RBI