Deposit Insurance the Indian System

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Deposit Insurance - the Indian System

• Usha Thorat
• Deputy Governor
• Reserve Bank of India
• March 29, 2007

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Introduction

• Significant changes in the financial systems
  world over, in the recent years
• Banking Regulation/Supervision and Deposit
  Insurance, critical for financial safety net,
  need to evolve continuously to meet the emerging
  challenges

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Deposit Insurance - Historical Perspective

• The Global scene
• Systemic crises in banking sector around the
  globe in last two decades
• 112 episodes of systemic crisis in 93 countries
  and 51 episodes of borderline crisis in 46
  countries (Caprio and Klingebiel, 1999).
• Fiscal costs in the 1997 Thai and Korean banking
  crises exceeded 30 of GDP, In Indonesia,
  budgetary costs approached 50 of GDP (World
  Bank, 2001)
• Full costs of such crises go beyond direct fiscal
  costs

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Deposit Insurance - Historical Perspective

• At home, in India
• Failure of Travancore National and Quilon Bank
  (1938), crisis in Bengal (1946-48) failure of
  Laxmi Bank, Palai Central Bank (1961)
• Legislation of Deposit Insurance Act, 1961
• Establishment of Deposit Insurance Corporation
• Integration of Deposit Insurance and Credit
  Guarantee functions in 1978 Deposit Insurance
  and Credit Guarantee Corporation (DICGC) set up

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Financial Safety Net for Banking Sector

• Financial safety nets to make systemic banking
  breakdowns less likely, and when they do occur,
  to limit the disruption and fiscal costs
• Financial safety nets require, inter-alia,
  prudential regulation/supervision, lender of last
  resort, deposit insurance, a clearly defined
  resolution mechanism for banks in distress.
• Deposit insurance is a key tool in protecting
  small depositors and ensuring public confidence
  in the banking system.

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Indian Financial System an Overview

• Indian Financial System comprises -
• Banks, financial institutions, non banking
  companies and firms - functionally varied and
  geographically widespread
• Vast network of more than eighty thousand
  branches of commercial banks, Local Area Banks,
  Regional Rural Banks, Rural Co-operative
  banks/institutions and Urban Cooperative banks

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Deposit Insurance in India
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Deposit Insurance in India
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Deposit Insurance in India
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Deposit Insurance in India

• Deposit Insurance in India - a Pay Box System
• Infuses confidence in banking system
• Contributes to smooth functioning of payments
  system
• Reduces potential for moral hazard by placing
  limits on insurance
• Facilitates exit of problem banks

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Deposit Insurance in India

• Ownership and Governance
• The DICGC, which operates the Deposit Insurance
  Scheme in India, has
• Government backing,
• Is created under an Act of Parliament and is
• Wholly owned by the Reserve Bank of India.

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Deposit Insurance in India

• Moral hazard in deposit insurance
• how avoided?
• Only bank deposits are covered up to Rs.100000
  per depositor
• Stiff regulatory action to avoid moral hazard
• Commercial banks-subject to adequate regulation/
  supervision
• Cooperative banks - problems in dual regulation
  erosion of public confidence (2002) restoration
  of confidence through appropriate policy responses

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Deposit Insurance in India

• Market Discipline
• Reliance on market discipline to address moral
  hazard
• Penalties levied on banks are placed in the
  public domain
• Most commercial banks are listed entities
• Audits and inspections, accountability for
  actions

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Deposit Insurance in India

• Premium and Deposit Insurance funds
• Uniform premium in India irrespective of the risk
  
• Considering possibilities of moving over to risk
  based premium system
• Premium from member-banks goes to fund Deposit
  Insurance Fund (DIF) of DICGC (ex-ante)
• Fund is invested only in Central Government
  securities.
• Reserve Ratio 0.92 (as of March 2006)
• DIF has a line of credit from the Reserve Bank to
  meet any shortfall in funds requirement

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Deposit Insurance in India

• Information sharing, liaison with Regulator
• Information sharing arrangement with RBI
• Deputy Governor of the RBI is the Chairperson of
  the Board of Directors of the Corporation.
  Government representative also on the Board
• Close liaison maintained with the supervisory
  departments of Reserve Bank and NABARD

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Deposit Insurance in India
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Deposit Insurance in India

• Reimbursing Depositors
• Corporation is required to settle claim within
  two months of receipt of claims.
• liquidator is required to submit the claim list
  within three months of taking charge
• Delay in submission of claim list by liquidators.
  Main reasons include delay in audit, poor
  maintenance of records, inclusion of ineligible
  deposit accounts, absence of documents, filing of
  appeals against liquidation order
• Measures initiated to avoid delays including
  close monitoring and training liquidators and
  auditors

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Deposit Insurance in India

• Recovery measures
• Liquidators to repay Corporation on disposal of
  assets
• Recovery performance poor, particularly in co-op
  banks
• Measures to improve recovery performance -
  setting up recovery cells, proactive monitoring,
  steps to ensure appointment of professionally
  qualified liquidators, suitable amendment to
  DICGC Act initiated for according distinct
  priority to the Corporation in recoveries

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Deposit Insurance in India

• Public Information and Awareness
• Well-developed web-site with comprehensive
  information/ material
• FAQs on deposit insurance, other publicity
  material is circulated to all banks
• Complaint cells set-up in all regional offices
  with wide publicity

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Our experience run on a large bank

• Run on a Multi State Urban Co-operative Bank in
  Gujarat in 2001 - large exposure to a Stock
  Broker, who suffered huge losses in share
  dealings
• Substantial inter bank deposits from 233 out of
  326 co-op banks in the State
• Contagion effect - liquidity problem in the
  sector- a severe systemic risk
• Reconstruction Scheme by Govt. in consultation
  with RBI - infusion of funds, retention of
  existing deposits, settlement of depositors
  claims
• Proactive strategy of the central bank and DICGC,
  especially in treatment of affected banks,
  repayment of public deposits, helped revive
  public confidence in the system.

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Deposit Insurance - the Indian System

• Thank You