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Hike in deposit insurance will not affect bank balance sheets, says RBI deputy governor BP Kanungo

The central bank also sacked the board of the bank and appointed an administrator.The central bank also sacked the board of the bank and appointed an administrator.

The Reserve Bank does not see any major impact on the balance-sheets of banks due to the five-fold hike in deposit insurance to Rs 5 lakh.

Following the failure of a number of cooperative banks, with the city-based PMC Bank being the latest and the largest last year, the budget allowed the Deposit Insurance and Credit Guarantee Corporation (DICGC) to raise deposit insurance coverage to Rs 5 lakh from Rs 1 lakh.

“The premium is something, which we consider, will increase from 10 paise to 12 paisa per Rs 100 for the time being. So, the impact on banks’ balance sheets is not likely to be much,” RBI Deputy Governor B P Kanungo told reporters during the post-policy presser.

The hike in deposit insurance coverage has been a long pending demand from bank depositors and it recently came to fore after the crisis at Punjab & Maharashtra Cooperative (PMC) Bank. It can be noted that in 2019 alone more than 30 cooperative banks went belly up in Maharashtra alone.

The DICGC, a wholly-owned subsidiary of the Reserve Bank, provides insurance cover on bank deposits. At present, the DICGC provides Rs 1 lakh insurance to a depositor regardless of the deposit amount, in case the lender fails or gets liquidated.

The corporation insured each bank depositor up to a maximum of Rs 1 lakh for both principal and interest amount held by them as on the date of liquidation/cancellation of a bank’s licence or the date on which the scheme of amalgamation/merger comes into force.

It can be recalled that way back in 2009, the Raghuram Rajan committee on financial sector reforms had recommended strengthening the capacity of the DICGC, a more explicit system of prompt, corrective action, and making deposit insurance premia more risk-based.

On the PMC Bank crisis, Das said the administrator and the advisory committee now have greater clarity with regard to the financial position of the bank and they are working out the next course of action.

The multi-state co-operative bank has been put under an RBI administrator since September 23, 2019, after the regulator found financial irregularities including under reporting of loans and non performing assets of real estate developer HDIL.

The central bank also sacked the board of the bank and appointed an administrator.

In September, it was reported that the co-operative lender’s actual exposure to the bankrupt HDIL was over Rs 6,500 crore — which is 73 per cent of its entire assets of Rs 8,880 crore.

Meanwhile welcoming the budget proposal to make the RBI the full regulator of cooperative banks, deputy governor MK Jain said, handling the full regulatory control of cooperatives to the RBI will strengthen the hands of the regulator.

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