PROTECTION OF THE DEPOSITORS
Author: Rupa Shaw, IV year of B.Sc.,LL.B. from KIIT School of Law
Banks play a major role in society and our day to day life. The depositors need to deposit their unused amount to the bank so that it can grow and the bank needs the deposits to lend out loans and to grow themselves. If the interest of the depositors is not protected, then the depositors will not be interested to make deposits in the bank so to attract more deposits the protection of the depositors is required. This paper deals with the protection of the depositors, protection of depositors in bank deposits, protection of the depositors in NBFC and protection of the depositors in the winding up of the banking company.
KEYWORD: Protection, Depositors, Insured.
Banking is a financial institution that gives loans and accepts deposits. The banking structure in India is divided into a Schedule bank and an unscheduled bank. Scheduled banks are the banks that come under Schedule two of the RBI Act, 1934 and Unscheduled banks are the banks that do not come under Schedule two of the RBI, 1934.
Depositors are the person who keeps money in banks. There are two types of deposits in the bank- Time deposits and demand deposits. Time deposits are also known as Term deposits in which deposits are fixed for the specific term and the customer earns interest in the deposits. Fixed deposits and Recurring deposits is also a type of time deposits. In fixed deposits, depositors put a specific amount into the bank and fix it for a certain fixed tenure and earn interest on the amount fixed. In recurring deposits, the depositors have to deposit the amount at a regular interval until the tenure is over but the depositors cannot encash the amount in between. The amount deposited and the interest earned is received by the depositor at the end of the tenure. Tenure of the recurring deposits is anything from 6 months to 120 months. Demand deposit on the other hand is the deposit where the depositor can take out the deposits whenever there is demand. Withdrawal of money from the demand deposits is easier and it can be done simply by going to the bank or through the ATM. A demand deposit is commonly used in saving Accounts and Current Accounts.
DEPOSIT INSURANCE SCHEME
The failures of the bank in the 19th century as well 20th century raised the need to protect the depositors. In 1960, there was the failure of Laxmi Bank failed and thereafter Palai Central Bank failed which led to the existence of Deposit Insurance in India. The bill for the introduction of the Deposit Insurance Corporation (DIC) was initiated on 21 of August 1961 in parliament. The parliament gave assent to the bill on 7 December 1961. The Functions of the Deposit Insurance Corporation came into function on the 1st of January, 1962. In 1978 Deposit Insurance Corporation merged with Credit Guaranteed Corporation and formed Deposit Insurance and Credit Guarantee Corporation (DICGC) and the Deposit Insurance Act, 1961 was changed to form Deposit Insurance and Credit Guarantee Corporation Act, 1961.
The Commercial Banks in India also the foreign bank branches that are working in India, RRB (Regional Rural Banks), Local area banks all this are insured by DICGC. DICGC function is to protect the interest of the deposits in the bank in India. A maximum amount of one lakh is insured for the depositors in the bank This insured one lakh includes both principal amount and interest amount of the deposition in the same capacity and right as on the date of the liquidation or licence of the bank cancelled or in the scheme of merger, amalgamation, reconstruction came into effect.
DICGS is a wholly-owned subsidiary of the RBI. DICGC protects all types of deposits including savings Deposits, Recurring Deposits, Fixed Deposits and Current Deposits but DICGC does not protect the following deposits: -
Foreign Governments made deposits
Central/ State Governments made deposits
Deposits of Inter-bank
The State Land Development Banks deposits with the state Co-operative banks
The amount which is due on any deposit that is received outside India
The amount specifically exempted by the corporation with the previous approval of RBI.
Depositors in the Non-Banking Financial institution are not insured under the DICGC.
In India Commercial banks and cooperative banks are covered under DICGC. In Commercial banks, only Public Sector, Private Sector and Foreign banks are insured under DICGC. The maximum Deposit amount covered by DICGC is five lakh rupees from 4th February 2020 onwards and before 4th February 2020, it was one lakh rupees. The total ceiling amount is five lakhs. If a person in distinct branches of banks has deposits the total amount insured for that depositor is five lakh rupees all together including all the deposits done in the distinct branches of a bank, total claim from all deposits, saving deposits, current deposits recurring deposits of the depositor is five lakhs rupees. Each bank will have its DICGC insured. For example, if one has the first deposit in bank 1, second deposit in bank 2 and third deposit in bank three then the coverage limit for the deposit insurance for each bank is not held as one but counted separately. Bank 1 will have its five lakh rupees insured and bank 2 will have its own five rupees insured and so on.
The printed leaflets presented by the bank include whether the bank is DICGC insured or not and if not printed or the depositor has any specific doubt regarding that then he can enquiry directly from the branch official. If the depositors have an amount insured under DICGC and the bank has dues against the depositors then the bank can set off the dues from the amount of deposit insurance and give the net amount to the depositors after setting off. It is the insured bank that bears the deposit insurance premium to seek this Deposit insurance under DICGC, it is not deducted from the account of the depositor.
When is DICGC liable?
DICGC is liable only when the Bank goes into liquidation or when the bank merges or amalgamates with another bank. If the bank is in moratorium it does not make the DICGC liable to pay. In the case of merger or amalgamation, the DICGC is liable to pays to the transferee bank and in the case of liquidation, at the time of liquidation, the DICGC pays to the liquidator appointed to effect the liquidation and the liquidator pays to the depositors. Liquidators check the account of all the depositors and make a claim list of depositors which he submits to the DICGC and DICGC will verify the list given by the liquidator and then gives the amount to the liquidator to distribute among the depositors. The DICGC and the depositors do not deal directly with each other, there is a liquidator in between as a medium of communication.
The banks cannot withdraw from the deposit insurance scheme. The bank must opt for a deposit insurance scheme. The DICGC can withdraw deposit insurance coverage from any bank if the bank did not pay the premium for consecutive three months. If the DICGC withdraws the coverage of deposits insurance from the bank for the reason of non-payment of the premium for consecutive three months, the public will be notified of such withdrawal through the newspaper. If the Bank has paid the premium for a few months then the DICGC will be liable up to the premium paid by the bank and not further. One of the consequences of the withdrawal of the deposit insurance by the DICGC is that the licence of the bank can also get suspended.
Present Scenario on Deposit Insurance and Credit Guarantee Corporation
Previously of 2020, one lakh rupees was to be given to the depositor in case of failure of the bank but in the present scenario in case of the bank failure or for any other financial pressure on the bank the withdrawal from the bank is not happening than the depositors will instantly get the entry to the deposits up to the number of Rupees five lakh under deposit insurance.[i] These five lakhs are the amount that the depositors have insured in the Deposit Insurance and the Credit Guarantee Corporation Act,1961. This is very helpful for the depositors for time being and fulfilling their immediate financial needs. The Deposit Insurance and Credit Guarantee Corporation (Amendment) Bill 2021 had given greater say to DICGC in the liquidation process of the bank and to presume priority over the creditors to expedite payment to DICGC from the bank liquidated. The current that of 15 paise per rupees 100 of deposit on the insurance premium is to be removed and the DICGC is free to charge a higher insurance premium from the bank.
Reason for such hike in the Deposit Insurance
In September 2019, the Punjab and Maharashtra Cooperative Bank Ltd (PMC Bank) failed. The PMC bank held deposits of over 11,000.[ii] The failure caused so much panic situation in the depositors as the only amount that was insured by the DICGC was one lakh only but if the amount would have insured up to five lakh rupees then the depositors do not have to face much loss.[iii] That is why Ms. Nirmala Sitharaman proposed in the 2020 budget to increase the insured amount in the deposit scheme from one lakh rupees to five lakh rupees.
PROTECTION OF THE DEPOSITORS IN NON-BANKING FINANCIAL COMPANY
A non-Banking Financial company is a company having the primary business of accepting deposits either at one time or by the method of instalment or in any method under any scheme or arrangement. NBFC is engaged in the business of granting loans and can acquire shares or securities etc. that are issued by the government. NBFC are not the institution having the primary business of any agricultural or industrial activity or purchasing or selling of goods except securities and providing service or sale or construction or purchase of the immovable property.
Non-Banking Financial Companies can take deposits from the public for a min period of 12 months and a max period of 60 months. NBFC does not receive deposits that are payable on demand. The deposits made in NBFC are not insured.
Protection of the interest of depositor in NBFC
When the Non-Banking Financial Company fails in repayment to the depositors the deposit amount or part thereof as per the terms and condition of the deposits, the company law board either by itself or on the application of the depositors can order the NBFC to provide payment of the deposits or part of the deposit as may be the case to the depositor with the time specified or subject to the conditions mentioned in the order made by the Company Law Board. The depositors can apply to the Company Law Board by mailing an application for the repayment of the amount which the depositor is entitled to receive by a non-banking financial company to the significant and proper bench of the Company Law Board having the territorial jurisdiction to take the complaint. The depositor needs to provide the prescribed fee for the Company Law Board.
RBI measure to protect the depositors in NBFC
The RBI does not guarantee the repayment of the deposits in the Non-Banking Financial Company. RBI has framed rules and regulations on accepting deposits by the NBFC. RBI has provided for inspection of the NBFC. If through inspection of the NBFC or by the audit of NBFC or through market intelligence or complaint RBI get to know that NBFC is not complying with the direction or regulation issued by the RBI then the RBI can restrict the Non-Banking Financial Company to receive any further deposits and the RBI will prohibit the NBFC from disposing of their assets. In case the depositor had filed a complaint to the Company Law Board for the repayment of the deposit amount or part thereof and the Company Law Board has ordered for repayment and the Non-Banking Financial Company has not complied with the order of the Company Law Board then also the Reserve Bank of India initiate Criminal as well as proceedings against of the NBFC for winding up or any other action.
PROTECTION OF THE DEPOSITOR IN CASE OF WINDING UP OF THE BANKING COMPANY
Section 43A of the Banking Regulation Act, 1949 deals with the protection of the depositors in case of the winding up of the banking company. Section 43A has a retrospective effect. When a proceeding of winding up of the banking Company is been initiated and the order has been given for winding up, the preferential payments that are mentioned in section 530 of the companies Act, 1956 shall be made within three months to the depositors by the official liquidator form the date of order or if order made before the commencement of the act than within three months from the commence of the act.[iv] After the depositors are paid then the left assets of the banking company are distributed among the creditors.
Individuals deposit their unused income in the bank to create a reservoir of funds. Banks withdraw the funds to provide loans to the people who need them. To give new loans the banks need to have more deposits and to make more deposits the amount of the deposit needs to be insured so that to encourage the depositors to go for more deposits. Effective deposit insurance has to balance two things: maintenance of confidence of the depositors as well as low down the direct and indirect cost of the deposit insurance. Deposit Insurance and Credit Guarantee Corporation encourage the depositors to make deposits by insuring up to five lakh rupees (including the principal and interest amount) of the depositors in case of failure of the bank. It acts as the protector for the bank depositors. In the case of NBFC, the depositors are protected by the Company Law Board and the depositors' interests are taken care of by the Reserve Bank of India. In case depositors have an issue regarding repayment they can apply to the Company Law Board for repayment of the amount and Company Law Board can order repayment to the depositors by the bank and such order is binding on the bank and if the bank does not comply with the order RBI can initiate proceedings against the bank. In case of winding up the preferential payment is made to the depositors.
[i] Naveen Kumar, If the bank fails, Rs 5 lakh deposit insurance amount to be available immediately to depositors, THE ECONOMIC TIMES (February 01, 2021, 12:24 PM), https://economictimes.indiatimes.com/wealth/personal-finance-news/if-bank-fails-rs-5-lakh-deposit-insurance-amount-to-be-available-immediately-to-depositors/articleshow/80626568.cms?from=mdr.
[ii] Anusha Chari & Amiyatosh Purnanndam, Reforming India’s deposit insurance scheme, Financial Express (April 14, 2021, 6:00 AM), https://www.financialexpress.com/opinion/reforming-indias-deposit-insurance-scheme/2232488/.
[iii] George Mathew, All you need to know about the hike in bank deposit insurance, THE INDIAN EXPRESS, (February 5, 2020, 12:45 PM), https://indianexpress.com/article/explained/explained-all-you-need-to-know-about-hike-in-bank-deposit-insurance-6248958/.
[iv] Akash Shah, Winding up of Banking Company, LEGAL SERVICE INDIA, (March 24, 2021, 8:30 PM), http://www.legalservicesindia.com/article/1346/Winding-Up-of-Banking-Company.html.