Deposit Insurance and Credit Guarantee Corporation (DICGC) Act, 1961

Deposit Insurance and Credit Guarantee Corporation (DICGC) Act, 1961

A crucial piece of legislation in India designed to:

• protect bank depositors
• maintain the stability of the banking system.

Purpose:

• To provide insurance for bank deposits, ensuring that depositors receive their funds even if a bank fails.
• To instill confidence in the banking system and prevent panic withdrawals during times of financial distress.
• Originally it also had a Credit Guarantee function, but those functions were separated.

 

• Establishment of DICGC: The Act established the DICGC, a wholly owned subsidiary of the Reserve Bank of India (RBI).

• Deposit Insurance Coverage:
  • The DICGC provides insurance coverage for deposits held in eligible banks, including commercial banks, regional rural banks, and cooperative banks.
  • Currently, the deposit insurance coverage is ₹5 lakh per depositor per bank. This means that if a bank fails, each depositor is entitled to receive up to ₹5 lakh from the DICGC, regardless of the amount of their deposits.

• Insured Deposits:
  • The insurance covers various types of deposits, including savings accounts, current accounts, fixed deposits, and recurring deposits.

• Premium Payment:
  • Banks are required to pay insurance premiums to the DICGC.

• Bank Failure and Payout:
  • In the event of a bank failure, the DICGC is responsible for paying the insured amount to depositors.
• Role of RBI:
  • The RBI plays a vital role in supervising and regulating the DICGC.
• Amendment of the act:
  • Recent amendments have allowed for quicker access to insured funds for depositors of troubled banks, even before the complete liquidation of the bank.

Significance:

• Depositor Protection
• Financial Stability
• Promoting Banking Habits

 

STRUCTURE OF THE ACT

Part I: Preliminary

• This part contains the introductory sections, including:
  • Short title, extent, and commencement.
  • Definitions of key terms used throughout the Act.

 

Part II: Establishment and Management of Deposit Insurance Corporation

• This part deals with the formation and administration of the Deposit Insurance Corporation (now DICGC). It covers:
  • Establishment and incorporation of the Corporation.
  • Capital structure.
  • Management of the Corporation, including the Board of Directors.
  • Functions of the Managing Director.

 

Part IIA: Credit Guarantee Functions

• This part outlines the Credit Guarantee functions of the DICGC.

 

Part IIB: Deposit Insurance Functions

• This part details the deposit insurance functions of the DICGC.
  • It covers the registration of eligible banks as insured banks.
  • It defines the Corporation’s liability to depositors.
  • It specifies the procedures for paying out insured deposits in the event of bank failures.
  • It also deals with the premiums that insured banks must pay.

 

Part III: Funds, Accounts and Audit

• This part focuses on the financial aspects of the DICGC:
  • Establishment of various funds.
  • Maintenance of accounts.
  • Audit procedures.

 

Part IV: Miscellaneous

• This part includes a variety of supplementary provisions:
  • Staffing matters.
  • Returns to be submitted by insured banks.
  • Inspection powers.
  • Penalties for offenses.
  • Power of the Central Government to give directions.
  • Power to make regulations.

 

The Deposit Insurance and Credit Guarantee Corporation Act, 1961 (DICGC Act)

SALIENT FEATURES

1. Establishment and Objective:

• The Act provides for the establishment of the Deposit Insurance and Credit Guarantee Corporation (DICGC).
• The primary objectives are to insure deposits in banks and guarantee credit facilities (though the credit guarantee function has been largely phased out, with the focus now primarily on deposit insurance).
• The DICGC is a wholly-owned subsidiary of the Reserve Bank of India (RBI).

 

2. Mandatory Insurance:

• The deposit insurance scheme is compulsory for all eligible banks operating in India. No bank can withdraw from it.

 

3. Coverage of Banks:

• The DICGC covers the following types of banks:
  • All commercial banks, including branches of foreign banks functioning in India.
  • Regional Rural Banks (RRBs).
  • Local Area Banks.
  • Cooperative banks (all eligible State, Central, and Primary cooperative banks).
• Exclusions: Certain deposits are not insured, such as:
  • Deposits of foreign governments.
  • Deposits of the Central and State Governments.
  • Inter-bank deposits.
  • Any amount due on account of any deposit received outside India.
  • Deposits specifically exempted by the DICGC with the RBI’s prior consent.
  • Deposits with State Land Development Banks.
  • Non-banking financial companies (NBFCs) are not covered.

 

4. Extent of Insurance Cover:

• The Act specifies the limit of insurance coverage per depositor per bank. Currently (as of February 2020), the deposit insurance cover is ₹5 lakh per depositor per bank. This includes both the principal and interest amount.
• If a person has accounts in different branches of the same bank, all these accounts are aggregated, and the maximum insured amount remains ₹5 lakh.
• If a person has accounts with different banks, the insurance cover of ₹5 lakh is available for the deposits held in each bank separately.

 

5. Premium Payment:

• The insured banks pay the insurance premium to the DICGC. Depositors do not directly bear this cost.
• The DICGC is empowered to determine the rate of premium, with the approval of the RBI.

 

6. Reimbursement in Case of Bank Failure:

• If an insured bank goes into liquidation, the DICGC is liable to pay each depositor up to the insured amount (currently ₹5 lakh).
• The DICGC (Amendment) Act, 2021 inserted Section 18A, which mandates that when the RBI imposes restrictions on a bank, the DICGC shall pay the depositors the insured amount within a stipulated time frame (currently within 90 days of the imposition of restrictions). This aims for quicker relief to depositors.
• The DICGC makes the payment to the depositors through the liquidator appointed for the failed bank.

 

7. Funds of the DICGC:

• The DICGC maintains three main funds:
  • Deposit Insurance Fund: Funded by premiums received from insured banks, used for settling deposit insurance claims.
  • Credit Guarantee Fund: (Though less active now) was funded by guarantee fees and used for settling credit guarantee claims.
  • General Fund: Used for the establishment and administrative expenses of the Corporation.
• Surplus funds are invested in Central Government securities.

 

8. Management:

• The management of the DICGC vests with a Board of Directors, with a Deputy Governor of the RBI as the Chairman.

 

9. Powers of DICGC:

• The DICGC has the power to register and cancel the registration of insured banks.
• It can call for information and returns from insured banks.
• The RBI can inspect insured banks, and the DICGC has access to the banks’ records.
• The DICGC can take measures to protect its interests and the interests of the depositors.