Keeping Savings Safer

Context: The amendments to Deposit Insurance and Credit Guarantee Corporation (DICGC) create a win-win for savers and bode well for the financial stability and public confidence in the banking system.

Need for DICGC: Due to India’s high savings rate, it becomes imperative to ensure depositors trust.

• Savings rate in India stands much above the global average at 28.35%.
• Reasons for high savings rate:
  • Twin factors: Consumption level over income and depositors’ trust in banks.
  • Systemic stability of banking sector by the RBI and GoI: Even in instances like Punjab & Maharashtra Co-operative (PMC) Bank and Yes Bank in the recent past, timely action has been taken.
• Implications of a high savings rate: It signifies - 
  • Financial sector’s ability to meet capital investment requirements for economic Growth.
  • Higher flow of savings to the banking sector ensures inclusive Growth by way of its suitability for smaller size loans.

Need for the maintenance of trust in banking stability

• Depositor perspective: A sudden moratorium or embargo on access to bank accounts and limits on withdrawal of deposits results in untold misery, despite deposit insurance being in place.
• Banking sector perspective: It can also lead to a wider contagion by which a large number of depositors of various other banks may also want to withdraw their deposits at the same time.
• Regulator perspective: Need for an adequate systemic safety net in light of increasing financial inclusion.
  • Since the launch of Pradhan Mantri Jan Dhan Yojana (PMJDY) and Digital India, more than 42 crore accounts have been opened under PMJDY, and digital transactions have registered a compounded annual growth rate of 43% over the last decade. 
  • This has brought a large number of MSMEs and small savers within the banking system.

Significance of the Deposit Insurance and Credit Guarantee Corporation (Amendment) Bill

• Provides for interim payments: In cases where any moratorium, direction, order or prohibition has been imposed by RBI, the Bill now provides for interim payments to be made to depositors.
• Ensures time-limit: The Bill puts a clear-cut time limit of 90 days, within which the depositors of such banks have to be paid. 
• If RBI finalise a scheme through amalgamation, reconstruction, etc., to rescue the bank, there is a provision to extend this timeline by a maximum of 90 more days.
• The provisions of the Bill cover existing cases where the banks are already under such restrictions. 
• Strengthen a forward-looking framework to provide support innovation by giving more power to DICGC to defer repayment by the transferee bank to it.