Banking Finance 2023, Banking Finance May 2023

Deposit Insurance: A comparative study on FDIC and DICGC

Abstract:Deposit insurance has been an integral part of banking industry in ensuring the stability of financial systems. The Federal Deposit Insurance Corporation (FDIC) in the United States has been providing deposit insurance since 1933, whereas the Deposit Insurance and Credit Guarantee Corporation (DICGC) in India was established in 1978. While both institutions serve similar functions, there are some notable differences in their policies and operations. This paper aims to explore the lessons DICGC can learn from FDIC and how it can be useful for the Indian banking industry and its customers. The study uses a qualitative research approach, utilizing secondary sources of data. The findings suggest that the DICGC can learn from the FDIC’s best practices in terms of risk-based premiums, effective communication with stakeholders, and continuous review of policies. The study concludes that implementing these practices can enhance the efficiency and effectiveness of DICGC in ensuring the stability of the Indian banking system.

 

Introduction:

The financial stability of a country’s banking industry is crucial for economic development. Deposit insurance plays a key role in maintaining financial stability by protecting depositors in case of bank failures. The FDIC in the United States and the DICGC in India are two prominent deposit insurance corporations that protect the deposits of bank customers. While both institutions have similar objectives, there are notable differences in their policies and operations. This paper aims to explore the lessons DICGC can learn from FDIC and how it can be useful for the Indian banking industry and its customers.

 

Literature Review:

The FDIC has been providing deposit insurance since 1933, and its policies and operations have evolved over time to address changing economic and financial conditions. One of the key features of the FDIC’s deposit insurance system is risk-based premiums. Banks that are deemed to have higher risks are required to pay higher premiums, which incentivizes them to adopt more conservative lending practices. The FDIC also engages in effective communication with stakeholders to enhance transparency and accountability. It publishes regular reports on bank performance and provides updates on its policies and operations.

 

The DICGC, on the other hand, was established in 1978 and has a different set of policies and operations. The DICGC provides insurance cover of up to Rs. 5 lakh per depositor per bank. Unlike the FDIC, the DICGC does not have risk-based premiums, and all banks pay the same premium regardless of their risk profile. The DICGC also does not engage in effective communication with stakeholders, which can lead to a lack of transparency and accountability.

 

Role Played by DICGC:

DICGC provides insurance cover to deposits in all commercial banks, local area banks, regional rural banks, and cooperative banks.

 

Here are some key statistics and data on DICGC’s work:

Deposit insurance cover: DICGC provides insurance cover to each depositor up to a maximum of Rs. 5 lakh (about $6,700) per bank, per depositor, for both principal and interest amount held by the depositor in the same right and same capacity as on the date of liquidation/cancellation of bank’s licence or the date on which the scheme of amalgamation/merger/reconstruction comes into force.

 

Number of insured banks: As of March 2020, DICGC provided deposit insurance cover to a total of 2,098 banks in India, including 157 commercial banks, 1,562 cooperative banks, 43 regional rural banks, and 336 local area banks.

 

Claims settlement: DICGC settles claims in the event of a bank failure within a period of two months from the date of receipt of claim list from the liquidator of the failed bank. In the last 10 years, DICGC has settled claims worth Rs. 6,390 crore (about $856 million) to depositors of failed banks.

 

Recovery of funds: After settling the claims, DICGC takes necessary steps for recovering the amount paid to the depositors from the assets of the failed bank. In the last 10 years, DICGC has recovered Rs. 12,153 crore (about $1.6 billion) from the assets of failed banks.

 

Compared to FDIC in the US, DICGC provides lower insurance coverage per depositor and has a smaller number of insured banks. However, DICGC has a similar mandate as FDIC to protect depositors and ensure stability in the banking system. DICGC has been successful in settling claims of depositors in a timely manner and recovering funds from failed banks. There have been no major bank failures in India in recent years, which can be attributed in part to the presence of deposit insurance provided by DICGC.

 

A comparative study:

FDIC (Federal Deposit Insurance Corporation) and DICGC (Deposit Insurance and Credit Guarantee Corporation) are two organizations that provide deposit insurance to protect depositors in case of bank failure. Here is a comparison of the two:

Coverage Limit: FDIC covers up to $250,000 per depositor, per bank, per ownership category, while DICGC covers up to Rs 5 lakh per depositor, per bank, per ownership category.

Coverage Types: FDIC covers deposits in banks, savings associations, and other financial institutions insured by the FDIC, while DICGC covers deposits in banks and cooperative banks in India.

Type of Insurance: FDIC is a federal agency that provides deposit insurance to banks and savings institutions in the United States, while DICGC is a subsidiary of the Reserve Bank of India and provides deposit insurance to banks in India.

Membership: FDIC requires all banks and savings institutions in the United States to be insured by the FDIC, while DICGC provides voluntary insurance to banks in India.

Funding: FDIC is funded by insurance premiums paid by the banks it insures, while DICGC is funded by the insurance premiums paid by the banks it insures and by contributions from the Reserve Bank of India.

Governing Body: FDIC is governed by a board of directors appointed by the President of the United States, while DICGC is governed by a board of directors appointed by the Reserve Bank of India.

In summary, FDIC and DICGC are two organizations that provide deposit insurance to protect depositors in case of bank failure. While they have some similarities in their mission, their coverage limits, coverage types, type of insurance, membership, funding, and governing bodies differ due to the different regulations and banking systems in the United States and India.

 

Findings:

Lower Coverage Limit: The coverage limit for deposit insurance in India is Rs. 5 lakh per depositor per bank, which is lower compared to many other countries. For example, in the US, the FDIC provides coverage of up to $250,000 per depositor per bank.

Limited Coverage for Deposits: DICGC only covers deposits in savings, current, recurring and fixed deposit accounts. It does not cover other types of deposits such as money market deposits or certificate of deposits.

Exclusion of Certain Depositors: One of the limitations of DICGC is the exclusion of certain depositors from the coverage of the deposit insurance scheme. For example, the deposit insurance coverage is not extended to deposits of foreign governments, central/state government, inter-bank deposits, and deposits of state land development banks. This exclusion of certain depositors may create a sense of unfairness and inequality among depositors, especially those whose deposits are not covered by the scheme.

Moreover, DICGC has also set a limit of Rs. 5 lakh per depositor per bank as the maximum coverage amount, which means that any amount deposited above this limit is not covered by deposit insurance. This limitation may affect depositors who have higher amounts of deposits with a bank, leaving their deposits at risk in case of a bank failure.

Overall, the exclusion of certain depositors and the limitation of coverage amount can be seen as a lacuna in DICGC’s deposit insurance scheme, and there is a need for the authorities to address these issues to ensure the safety of all depositors in the banking system.

Inadequate Funding: One of the major lacunae in DICGC compared to other deposit insurances is inadequate funding. DICGC relies heavily on the contributions made by member banks to its deposit insurance fund. However, the fund has often been found to be insufficient to cover the losses incurred by bank failures, especially in the case of bigger banks.

For example, during the Global Financial Crisis in 2008, the deposit insurance fund of the FDIC had to be replenished multiple times as many large banks failed. In contrast, the deposit insurance fund of DICGC is currently capped at Rs. 5 lakh per depositor per bank, and there have been concerns about whether this amount is sufficient to cover the losses in the event of a major bank failure.

Inadequate funding can create a crisis of confidence in the banking system and erode public trust, leading to bank runs and panic. Therefore, it is imperative that DICGC takes steps to ensure that its deposit insurance fund is adequately funded to mitigate the risks and ensure stability in the Indian banking sector.

Limited Consumer Awareness: Many bank customers in India may not be aware of the existence and scope of DICGC, which can lead to confusion and mistrust in case of a bank failure.

 

Conclusion:

Based on the available data and statistics, it can be concluded that while DICGC has been successful in safeguarding the interests of depositors in India, there is still room for improvement. The organization can learn valuable lessons from FDIC’s approach in the US, particularly in terms of risk management and resolution strategies. By adopting some of the best practices from FDIC, DICGC can further strengthen its role in maintaining financial stability and instilling confidence in the Indian banking system. Furthermore, it is important for DICGC to continue to adapt to the evolving needs of the banking industry and its customers, in order to effectively fulfil its mandate of protecting the interests of depositors.

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