Indian Finance Ministry Considers Raising Rs 5 L Deposit Insurance Limit amid Co-operative Bank issue. What is 1968 DICGC Rule?

The Indian Finance Ministry is contemplating an increase in the deposit insurance limit from the current ₹5 lakh, as indicated by M. Nagaraju, Secretary of the Department of Financial Services. This announcement follows recent regulatory actions taken against the New India Co-operative Bank due to liquidity issues and embezzlement. The discussions are part of broader considerations regarding the safety of deposits in the banking sector, particularly among co-operative banks.

1. Potential Increase in Deposit Insurance

During a post-Budget briefing, M. Nagaraju announced that discussions are ongoing regarding a potential increase in the deposit insurance limit, currently set at ₹5 lakh. This change would provide greater security for depositors, especially in light of recent banking challenges.

2. Who was responsible for the embezzlement of ₹122 crore at the New India Co-operative Bank?

The statement from Nagaraju follows the Reserve Bank of India’s (RBI) intervention with the New India Co-operative Bank. The bank faced liquidity issues, which were exacerbated by the embezzlement of ₹122 crore by its General Manager, Hitesh Mehta. This incident has raised concerns about the stability and safety of deposits in co-operative banks.

3. What did Regulatory emphasize about the co-operative banking sector?

Ajay Seth, Secretary to the Department of Economic Affairs, affirmed that the responsibility for ensuring the safety of deposits falls on regulatory bodies. He noted that while the co-operative banking sector has its challenges, many institutions are functioning effectively across various states. He urged against generalizing the issues of one bank to the entire sector, highlighting that co-operative banks are well-regulated.

4. What is the purpose of the Deposit Insurance and Credit Guarantee Corporation (DICGC) Act of 1961?

Depositors’ money is safeguarded under the Deposit Insurance and Credit Guarantee Corporation Act of 1961. The DICGC, established to protect depositors, steps in when banks face crises, ensuring that customer funds are secure even when withdrawals are halted. This protection has been in place since 1968 and was last adjusted in 2020 following significant banking sector failures.

5. Historical Context

The deposit insurance limit was previously set at ₹1 lakh since 1993 but was increased to ₹5 lakh in 2020 after the Punjab and Maharashtra Co-operative Bank’s collapse. This historical context underscores the importance of deposit insurance in maintaining depositor confidence and financial stability.

Examining the ₹122 Crore Embezzlement Case at New India Co-operative Bank: Implications for Regulatory Oversight and Depositor Protection in the Indian Banking Sector

• Embezzlement Case: The embezzlement case involving ₹122 crore at the New India Co-operative Bank highlights vulnerabilities within the banking system.
• Regulatory Actions: The RBI’s swift actions to curb the bank’s operations demonstrate the active oversight required to maintain trust in financial institutions.
• DICGC’s Function: The DICGC acts as a safeguard for depositors, reinforcing the importance of insurance in protecting against bank failures.

At last, The consideration of raising the deposit insurance limit reflects a proactive approach by the Finance Ministry to enhance depositor confidence amid recent banking challenges. While co-operative banks face scrutiny, it is crucial to recognize the broader regulatory framework that ensures the stability of the banking sector. The ongoing discussions about deposit insurance limits underscore the government’s commitment to safeguarding depositors and maintaining financial stability in India.