Page 50 - Banking Finance May 2023

ARTICLE

DICGC is governed by a board of directors appointed by the Inadequate Funding: One of the major lacunae in DICGC
Reserve Bank of India. compared to other deposit insurances is inadequate funding.
DICGC relies heavily on the contributions made by member
In summary, FDIC and DICGC are two organizations that banks to its deposit insurance fund. However, the fund has
provide deposit insurance to protect depositors in case of often been found to be insufficient to cover the losses
bank failure. While they have some similarities in their incurred by bank failures, especially in the case of bigger
mission, their coverage limits, coverage types, type of banks.
insurance, membership, funding, and governing bodies differ
due to the different regulations and banking systems in the For example, during the Global Financial Crisis in 2008, the
United States and India. deposit insurance fund of the FDIC had to be replenished
multiple times as many large banks failed. In contrast, the
Findings: deposit insurance fund of DICGC is currently capped at Rs.
5 lakh per depositor per bank, and there have been concerns
Lower Coverage Limit: The coverage limit for deposit
about whether this amount is sufficient to cover the losses
insurance in India is Rs. 5 lakh per depositor per bank, which
in the event of a major bank failure.
is lower compared to many other countries. For example,
in the US, the FDIC provides coverage of up to $250,000 per
Inadequate funding can create a crisis of confidence in the
depositor per bank.
banking system and erode public trust, leading to bank runs
and panic. Therefore, it is imperative that DICGC takes steps
Limited Coverage for Deposits: DICGC only covers deposits
to ensure that its deposit insurance fund is adequately
in savings, current, recurring and fixed deposit accounts. It
funded to mitigate the risks and ensure stability in the
does not cover other types of deposits such as money market
Indian banking sector.
deposits or certificate of deposits.
Limited Consumer Awareness: Many bank customers in
Exclusion of Certain Depositors: One of the limitations of
India may not be aware of the existence and scope of
DICGC is the exclusion of certain depositors from the
DICGC, which can lead to confusion and mistrust in case of
coverage of the deposit insurance scheme. For example, the
a bank failure.
deposit insurance coverage is not extended to deposits of
foreign governments, central/state government, inter-bank
deposits, and deposits of state land development banks. This Conclusion:
exclusion of certain depositors may create a sense of Based on the available data and statistics, it can be
unfairness and inequality among depositors, especially those concluded that while DICGC has been successful in
whose deposits are not covered by the scheme. safeguarding the interests of depositors in India, there is still
room for improvement. The organization can learn valuable
Moreover, DICGC has also set a limit of Rs. 5 lakh per lessons from FDIC's approach in the US, particularly in terms
depositor per bank as the maximum coverage amount, of risk management and resolution strategies. By adopting
which means that any amount deposited above this limit is some of the best practices from FDIC, DICGC can further
not covered by deposit insurance. This limitation may affect strengthen its role in maintaining financial stability and
depositors who have higher amounts of deposits with a bank, instilling confidence in the Indian banking system.
leaving their deposits at risk in case of a bank failure. Furthermore, it is important for DICGC to continue to adapt
to the evolving needs of the banking industry and its
Overall, the exclusion of certain depositors and the limitation customers, in order to effectively fulfil its mandate of
of coverage amount can be seen as a lacuna in DICGC's protecting the interests of depositors.
deposit insurance scheme, and there is a need for the
authorities to address these issues to ensure the safety of References:
all depositors in the banking system.
Various Sources.

BANKING FINANCE | MAY | 2023 | 47