The Deposit Insurance and Credit Guarantee Corporation (DICGC)
[Source: Website of DICGC]

Need to Ensure Protection of Depositors Interests

The failure of a commercial Bank leading to its temporary/permanent inability to pay back its depositors, when they deem to withdraw their savings, leads to an unprecedented economic crisis at the national level. A very large number of citizens of the country would have entrusted their hard earned savings to the custody of the bank depending the Institution as the safest of all savings mobilisers and would be severely ruined. In turn it could result in the shattering of the public confidence on the banking system as a whole, leading to a chain of catastraphic consequences like run on other banks though working normally on account panic stricken depositors vieing to withdraw their funds. Frequent bank failures in the Forties and earlier brought out this phenomenon to the forefront. The focus then was naturally on Insurance of bank deposits, which could give a measure of protection to depositors, particularly the smaller depositors, from the risk of loss of their savings arising from bank failures. Such protection infuses confidence in the minds of the public and contributes to the growth of the banking system by assisting in development of banking habits and mobilization of resources by the bank. In the Forties of the last century, we did not have a spread over banking system in the country. There were fewer private banks, which were insignificant in size or in terms of possession of aggregate deposits. Today Indian Banks have grown enormously in size and holding of total resources. The magnitude of an economic crisis that could eruopt on account of the failure of a bank at the present context is unimaginable. crisis

The concept of insuring deposits kept with banks received attention for the first time in the year 1948 after the banking crises in Bengal. The question came up for reconsideration in the year 1949, but it was decided to hold it in abeyance till the Reserve Bank of India ensured adequate arrangements for inspection of banks. Subsequently, in the year 1950, the Rural Banking Enquiry Committee also supported the concept. Serious thought to the concept was, however, given by the Reserve Bank of India and the Central Government after the crash of the Palai Central Bank Ltd., and the Laxmi Bank Ltd. in 1960. The Deposit Insurance Corporation (DIC) Bill was introduced in the Parliament on August 21, 1961. After it was passed by the Parliament, the Bill got the assent of the President on December 7, 1961 and the Deposit Insurance Act, 1961 came into force on January 1, 1962.

The Deposit Insurance Scheme was initially extended to functioning commercial banks only. This included the State Bank of India and its subsidiaries, other commercial banks and the branches of the foreign banks operating in India.

Since 1968, with the enactment of the Deposit Insurance Corporation (Amendment) Act, 1968, the Corporation was required to register the 'eligible co-operative banks' as insured banks under the provisions of Section 13 A of the Act. An eligible co-operative bank means a co-operative bank (whether it is a State co-operative bank, a Central co-operative bank or a Primary co-operative bank) in a State which has passed the enabling legislation amending its Co-operative Societies Act, requiring the State Government to vest power in the Reserve Bank to order the Registrar of Co-operative Societies of a State to wind up a co-operative bank or to supersede its Committee of Management and to require the Registrar not to take any action for winding up, amalgamation or reconstruction of a co-operative bank without prior sanction in writing from the Reserve Bank of India.

Afer nationalisation the thrust was on mass banking and rapid spread of branch banking in all parts of the country. The era of development approach to functions of banks required that banks had to tie their business products in tune to the national priorities. Small Scale Industries have higher employment protential, quicker gestation period and minimum capital investment. In order to encourage banks to step up extension of need-based credit to entrepreneurs setting up small scale industries, Government of India, in consultation with the Reserve Bank of India, introduced a Credit Guarantee Scheme in July 1960. The Reserve Bank of India was entrusted with the administration of the Scheme, as an agent of the Central Government, under Section 17 (11 A)(a) of the Reserve Bank of India Act, 1934 and was designated as the Credit Guarantee Organization (CGO) for guaranteeing the advances granted by banks and other Credit Institutions to small scale industries. The Reserve Bank of India operated the scheme up to March 31, 1981.

After thenationalisation of the 14 major banks in 1970, the emphasis was on geograpohical extension of banking facilities to rural and semi urban areas and coverage credit towards all productive segments & cover by every section of the society. To motivate bankjs to adopt a proactive attitude toqwardss this objective, a credit guarantee scheme for small loans was was considered and introduced by the Government of India in 1970. The Reserve Bank of India promoted a public limited company on January 14, 1971, named the Credit Guarantee Corporation of India Ltd. (CGCI). The main thrust of the Credit Guarantee Schemes, introduced by the Credit Guarantee Corporation of India Ltd., was aimed at encouraging the commercial banks to cater to the credit needs of the hitherto neglected sectors, particularly the weaker sections of the society engaged in non-industrial activities, by providing guarantee cover to the loans and advances granted by the credit institutions to small and needy borrowers covered under the priority sector.

With a view to integrating the functions of deposit insurance and credit guarantee, the above two organizations (DIC & CGCI) were merged and the present Deposit Insurance and Credit Guarantee Corporation (DICGC) came into existence on July 15, 1978. Consequently, the title of Deposit Insurance Act, 1961 was changed to 'The Deposit Insurance and Credit Guarantee Corporation Act, 1961'. The Corporation's objective is to provide for the benefit of depositors in banks, insurance against the loss of all or part of their deposits in all branches of a bank to a maximum of Rs.1,00,000. It also provided guarantee support to credit extended by participating institutions viz., commercial banks (including regional rural banks), co-operative banks, state financial corporations and other term lending institutions

Effective from April 1, 1981, the Corporation extended its guarantee support to credit granted to small scale industries also, after the cancellation of the Government of India's credit guarantee scheme. With effect from April 1, 1989, guarantee cover was extended to the entire priority sector advances, as per the definition of the Reserve Bank of India. Since 1990-91, certain categories of priority sector advances, which are guaranteed by Central/State Governments, ECGC etc., had been excluded from guarantee cover. Effective from April 1, 1995, all housing loans have been excluded from the purview of guarantee cover by the Corporation. Most of the Banks felt the credit guarantee scheme no longer attractive. It was the common view formany banks that the preimia contributed by them generally exceeded the insurance benefit received by them. With the modification in the terms and conditions in April 1995 all banks have opted out of the credit guarantee schemes. Hence the Corporation is not operating these Scheme now, but continues exclusively covering insurance of banks deposits.

The authorised capital of the Corporation is Rs.50 crore which is entirely issued and subscribed by Reserve Bank of India. The management of the Corporation vests in a Board of Directors of which a Deputy Governor, Reserve bank of India, is the Chairman. The Head Office of the Corporation is at Mumbai. It had four branches at Kolkata, Chennai, Nagpur and New Delhi. While their major functions have been taken up by the Head Office, the residual items of work have been vested with the DICGC Cells specially created in the Rural Planning and Credit Department, Reserve Bank of India at the respective centers.

The Corporation maintains two separate funds viz., Deposit Insurance Fund and Credit Guarantee Fund. They are funded by the premium and guarantee fees received and are utilised exclusively for meeting the respective claims. Besides, one more fund called General Fund, is maintained in which the capital of the Corporation is held and the staff establishment and administrative expenses are met from the investment income out of this fund. The Corporation was granted exemption from payment of income tax till 31 December 1986

For the easy understanding of different categories of bank depositors, the Corporation has provided an informative narrative by wayFAQ (answers to frequently raised questions) on its website. This is reproduced in the next article