At present, when a bank is placed under Directions, deposit withdrawals are capped and it ranges from ₹1,000 to ₹1 lakh of the total balance held by a depositor.
Depositors of Urban Co-operative Banks (UCBs), under Directions, may not have to sweat it out to get back their savings up to the ₹5 lakh insured amount, going by the amendments being considered to the Deposit Insurance and Credit Guarantee Act (DICGC), 1961.
At present, when a bank is placed under Directions, deposit withdrawals are capped — it ranges from ₹1,000 to ₹1 lakh of the total balance held by a depositor. This withdrawal cap is applicable for the entire period that a bank is under Directions.
Given that depositors of UCBs under Directions are finding it difficult to get by due to the severe restrictions on withdrawal of their savings, the Finance Ministry and RBI seem to be wanting to address this issue by allowing withdrawal up to the insured amount of ₹5 lakh, according to bankers in the co-operative sector.
The possibility of allowing deposit withdrawal up to the insured amount has brightened with the Deposit Insurance Fund (DIF) swelling to ₹1,10,380 crore at March-end 2020 from ₹93,750 crore of March-end 2019.
Further, following the deposit insurance limit being hiked five-fold to ₹5 lakh with effect from February 4, 2020, the deposit insurance premium rate per ₹100 deposit has also been increased to ₹0.12 (or 12 paise) with effect from April 1, 2020 against ₹0.10 (10 paise) earlier.
Since April 1, 2015, 52 UCBs have been placed under All Inclusive Directions by the Reserve Bank, per RBI’s Report on Trend and Progress of Banking in India 2019-20.
Out of the total claims settled by DICGC since inception, around 94.3 per cent of claims pertained to co-operative banks that were liquidated, amalgamated, or restructured.
Section 35A of the Banking Regulation Act, 1949, empowers RBI to give Directions to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a way prejudicial to the interests of the banking company; or to secure the proper management of any banking company.
A Bank under Directions cannot, without prior RBI approval, grant or renew any loans and advances, make any investment, incur any liability including borrowal of funds and acceptance of fresh deposits, among others.
If such a bank’s license is cancelled by RBI, triggering the commencement of liquidation proceedings, it is only then that depositors are entitled to repayment of their deposits from DICGC up to the ₹5 lakh monetary ceiling.
So far, very few banks under Directions have been revived. The time lag between a UCB first being placed under Directions till its license cancelled is fairly long.
For example, in the case of Mumbai-based CKP Co-operative Bank, it was six years. During this entire period, deposit withdrawal was capped at ₹10,000 per depositor.