The deposit insurance and credit guarantee corporation

Brief Background:

The functions of the DICGC are governed by the provisions of 'The Deposit Insurance and Credit Guarantee Corporation Act, 1961' (DICGC Act/Act) which has been amended now, and 'The Deposit Insurance and Credit Guarantee Corporation General Regulations, 1961' framed by the Reserve Bank of India in the exercise of the powers conferred by sub-section (3) of Section 50 of the said Act.

As stated in the preamble of the Deposit Insurance and Credit Guarantee Corporation Act, the Act establishes a corporation for the purposes of insurance of deposits and guaranteeing credit facilities, as well as for other matters related to them or incidental to them.

The Corporation is required by the Act to pay depositors of an insured bank the guaranteed deposit amount. Such a responsibility arises in the event that an insured bank: (i) liquidates, that is, sells all of its assets upon closing; (ii) reconstructs or enters into any other arrangement under a plan; or (iii) merges with or is acquired by another bank, that is, becomes a transferee bank.

Once the Corporation has paid the depositors, the liquidator, insured bank, or transferee bank (depending on the situation), is then required to pay the Corporation the same sum back. The Corporation's liability with respect to a deposit is reduced by the amount paid in respect of the deposit.

Origin of the 1961 Act:

On August 21, 1961, the Deposit Insurance Corporation (DIC) Bill was tabled in Parliament. The Deposit Insurance Act of 1961 went into effect on January

1, 1962, after receiving the President's assent on December 7, 1961, following Bill's passage by the Parliament.

Only operational commercial banks were initially eligible for the Deposit Insurance Scheme. This included branches of foreign banks with operations in India, the State Bank of India and its subsidiaries, and other commercial banks.
The Deposit Insurance Corporation (Amendment) Act, of 1968 required the Corporation to register "qualified co-operative banks" as insured banks pursuant to Section 13 A of the Act beginning in 1968.

The Reserve Bank of India also promoted the Credit Guarantee Corporation of India Ltd, a public limited company on January 14, 197. (CGCI) The two companies mentioned above (DIC and CGCI) were combined with the goal of combining deposit insurance and credit guarantee functions, and the current Deposit Insurance and Credit Guarantee Corporation (DICGC) was established on July 15, 1978. The Deposit Insurance Act of 1961 was consequently renamed "The Deposit Insurance and Credit Guarantee Corporation Act of 1961."

Enforcement Date of the Amended Act: 1 September 2021

Changes Made:

Through the Amendment, instead of cancellation based on the effect on the bank's liability, the government has prioritized the financial position of the country's banking system by raising the limit of 15 paisa p.a for 100rs with prior approval of the RBI.

Under Section 18 a new clause (A) is added wherein it has been provided that any direction or prohibition issued under the Banking Regulation Act which provides for restrictions on depositors of the such bank from accessing their deposits, then the Corporation shall become liable to pay to every depositor an amount equal to the amount mentioned under Section 16 of the Act.

Additionally, under Section 18(A) sub-clause 2 it has been given a list showing the outstanding deposits of each depositor of the insured bank, as on the date on which the direction, prohibition takes effect, shall be furnished by such insured banks within 45 days of such date. 

And within 30 days of receiving the list, the Corporation must verify the credibility of the claims made and the willingness of the depositor to receive the amount due to him. Those who give their affirmations must be paid within 15 days after the verification is done. Furthermore, such an amount shall discharge the insured bank from its liability to the depositor with reference to that deposit. 

The insured bank is then required to pay back the same amount to the Corporation once the Corporation makes a payment to the depositors. The bank is expected to make repayment within the time frame set forth by the corporation's board of directors. 

The Corporation may modify this deadline for the time frame and under the conditions outlined in any regulations established by the Board. Additionally, these rules must include provisions for (i) prudential standards to determine the bank's ability to pay back the corporation, and (ii) a bar on the bank releasing other specified liabilities pending payback.

If the Reserve Bank of India (RBI) lifts the limits placed on the bank for payment to depositors and (ii) the insured or transferee bank is able to pay the depositors without any restrictions, the Corporation would not be required to make the interim payment.

Premium paid by Banks to the Corporation: Insured banks are required to pay a premium to the Corporation on their deposits. The rate of premium for a bank is notified by the Corporation with the prior approval of RBI. The Act caps a bank's rate of premium (per annum) at 0.15 percent of all its outstanding deposits. The Corporation is permitted to raise this upper limit with RBI's prior consent. 

The Corporation may impose a penal interest charge for repayment delays. The difference between the repo rate and the punitive interest rate may not exceed 2%.