Justice for all: Hike insurance cover on bank deposits

Fight against black money. Put your funds in the 'system'. Resort to online transactions. Cashless economy. Great slogans that seem like a cruel joke when you realise that the insurance on your bank deposits is capped at a meagre one lakh rupees, irrespective of the quantum of investment. This is as per Section 16(1) of the Deposit Insurance & Credit Guarantee Corporation Act, 1961. What is the rationale behind a fixed amount? Shouldn't the insurance cover be proportionate to your holdings?

The original limit in the statute was one thousand five hundred rupees. There were periodic increases - five thousand rupees in 1968, ten thousand in 1970, twenty thousand in 1976 and thirty thousand rupees in 1980.  In 1993, it was raised to a lakh. Twenty six years ago, a lakh was a big amount. Not today. Why has this remained dormant for more than two and a half decades? The Financial Resolution and Deposit Insurance Bill, 2017, which could have ensured a raise in that limit, did not come through.

 So when hard working middle class folks who have put their life savings in banks, see justifiably distraught customers of the crisis hit Punjab & Maharashtra Cooperative Bank, who were initially allowed to withdraw just a thousand rupees in six months, later enhanced to ten thousand rupees, would they not have sleepless nights? The Reserve Bank of India (RBI) may claim that over 60 per cent of customers of  PMC bank can now withdraw their entire account balance, but what about the others who trusted the 35 year old multi-state bank and put their money in fixed deposits? If reports are to be believed, even an RBI Officers Society has a fixed deposit of over a hundred crore stuck with the troubled bank.

 Are depositors entitled to a pro rata sharing of available funds, over and above the one lakh insured amount? In 2005, the Madurai Bench of the Madras High Court, hearing a writ petition, had directed the official liquidator to pay depositors their dues with accrued interest. But the Supreme Court in Deposit Insurance & Credit Guarantee Corporation Vs Raghupathi Ragavan had overturned this decision. The Court ruled that "the High Court or any other authority has no power to direct payment in excess of `1 lakh by ignoring statutory provisions of the Act and the Regulations made thereunder."

 In the opening paragraphs of this judgment, the apex court observed that "normally a person deposits his savings or invests his money by way of a saving bank account or a fixed deposit with banking companies, including cooperative banks, without taking much care to ascertain the financial condition of the bank, possibly because of the trust reposed by him in the Reserve Bank of India, which regulates the banking business in the country." It added that "in the event of any financial difficulty faced by the banking company, the depositors would generally lose a substantial amount of their deposits, in whichever form made, because normally at the end of the winding-up proceedings, the unsecured creditors get very little."  

 The corporation has its tracks well covered under Section 21 of the Deposit Insurance & Credit Guarantee Corporation Act. Not only is it obligatory on the part of the Official Liquidator to pay the Corporation, the provision also stipulates that there shall be no other preferential creditor. The statute comes across as discriminatory and treats the ordinary bank depositor as a second class citizen.

 Banks, it is said, pay one paisa for every hundred rupees insured. Raising the threshold, would inevitably push up the premium to be paid by banks. There was once a debate over whether the burden of the increased premium should be borne by banks or transferred on to the depositors! Just wow. Why not ask customers to also foot the bank's security agency bill?

  What on earth is a safe place for honest tax payers to keep their savings? The stock market is volatile. Real estate is struggling. Cash at home is too risky, with the scars of demonetisation yet to heal. Gold? Fixed deposits, despite their low yield and zero tax benefits, have for long been the most trusted instrument. The depositor, who one would imagine, constitutes the life blood of the bank, is actually quite like a pedestrian on the road - a forgotten soul.

(The writer is an advocate at the Madras high court, columnist & author)