Deposit Insurance
- the Indian System
Usha Thorat
Deputy Governor
Reserve Bank of India
March 29, 2007
International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007
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
International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007
2
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
International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007
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
International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007
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.
International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007
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
International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007
Deposit Insurance in India
Table 1: Insured Deposits Coverage
(Position as at the end of September 2005)
1
2
3
4
Total number of accounts (in millions)
Number of fully protected accounts (in millions)
Percentage of 2 to 1 (%)
Assessable deposits (in US $ billions)
Insured deposits (in US $ billions)
Percentage of 4 to 3 (%)
International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007
537
506
94
407
239
59
Deposit Insurance in India
Table 2: Bank category-wise position
Banks
No. of
Banks
(1)
Commercial banks* (A)
(2)
221
(8.9%)
133
(5.4%)
2251
(91.1%)
2472
of which: RRBs
Cooperative banks (B)
Total (A+B)
Number of
insured
accounts
(in millions)
(3)
423
(78.7%)
43
(8%)
114
(21.3%)
537
(100%)
Assessable
deposits
(US $ billion)
Insured
Percentage
deposits
of (4) to (3)
(US $ billion)
(3)
369.46
(90.7%)
9.89
(2.4%)
37.56
(9.3%)
407.03
(100.0%)
(4)
211.49
(88.3%)
9.01
(3.7%)
27.83
(11.7%)
239.32
(100%)
Source: Trend & progress of banking in India (RBI), 2006; DICGC Annual Report, 2006
* including 28 public sector banks, 27 private sector banks, 29 foreign banks, 4 Local area banks and 133 RRBs
(Figures in brackets indicate share in total)
International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007
57.2%
91.1%
74.1%
58.8%
Deposit Insurance in India
Table 3: Component-wise break up of Cooperative banks position
Banks
No. of Banks
Cooperative banks
Urban cooperative banks
State cooperative banks
District central cooperative banks
Total
1853
(82.3%)
31
(1.4%)
367
(15.3%)
2251
(100%)
Number of
insured
accounts
(in millions)
Assessable
deposits
(US $ billion)
48
(42.1%)
4
(3.5%)
62
(54.4%)
114
(100.0%)
Source: Trend & progress of banking in India (RBI), 2006; DICGC Annual Report, 2006
International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007
16.78
(44.7%)
3.71
(9.9%)
17.07
(45.4%)
37.56
(100.0%)
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
International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007
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.
International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007
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
supervision
banks-subject
to
adequate
regulation/
• Cooperative banks - problems in dual regulation; erosion
of public confidence (2002); restoration of confidence
through appropriate policy responses
International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007
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
International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007
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
International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007
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
International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007
Deposit Insurance in India
Table 4: Amounts settled by DICGC along with recovery position – March 2006
(Amounts in US $ Million)
Amount Settled
(% share)
65.00
27
(14%)
400.00
147
(86%)
465.00
174
(100%)
Category of Banks No. of Banks
Commercial Banks
(incl. LABs, RRBs)
Co-operative Banks
Total
Recovery Amount
(% share)
20.00
75%
6.00
(25%)
26.00
(100%)
International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007
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
International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007
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
International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007
Deposit Insurance in India
Public Information and Awareness
• Well-developed
web-site
information/ material
with
comprehensive
• FAQs on deposit insurance, other publicity material is
circulated to all banks
• Complaint cells set-up in all regional offices with wide
publicity
International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007
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.
International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007
Deposit Insurance
- the Indian System
Thank You
International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007