Deposit Protection Scheme Obligations - Detailed Explanation

Deposit Protection is a financial safety net where if a bank fails, a statutory corporation pays depositors up to a limit. It prevents bank runs. There are two global models - India (DICGC) and EU (DGSD) - and obligations are similar.

1. INDIA - DICGC Framework

Law: Deposit Insurance and Credit Guarantee Corporation Act, 1961, amended by DICGC (Amendment) Act, 2021.

Coverage:

• Who is covered: All commercial banks including branches of foreign banks, Local Area Banks, Regional Rural Banks, Co-operative banks. All banks are registered as insured banks. The act will cover 98.3% of depositors and 50.9% of deposit value, way above global level
• Amount: Rs 5 lakh per depositor per bank for both principal and interest held in same right and same capacity. Earlier was Rs 1 lakh. In case individual's deposit exceeds Rs 5 lakh in single bank, only Rs 5 lakh will be paid
• What is covered: Savings, Fixed, Current, Recurring.
• What is NOT: Inter-bank deposits, Government deposits, deposits received outside India, State land development banks depositing with state co-operative bank.

Obligations of Banks (Insured Banks)

1. Compulsory Insurance & Premium Payment:
All eligible banks are required to be insured by DICGC. Once a bank is registered, paying prescribed premium is mandatory. The deposit insurance premium is compulsory for all insured banks and is paid by banks to DICGC and is not recovered from depositors.

• Premium Rate: 12 paise per Rs 100 per annum (0.12%).
• Paid half-yearly in advance.
• If bank fails to pay premium - it is still liable to depositors, but RBI can cancel banking license.

2. Depositor Data & Reporting Obligation:

• Maintain depositor-wise records in same right, same capacity.
• Submit returns (DI-01, DI-02) to DICGC.
• Under 2021 Amendment - Banks under moratorium must submit claim list within 45 days, DICGC to pay within next 45 days. So total 90 days timeline. DICGC will pay depositors of 21 insured banks placed under All Inclusive Directions an amount equivalent to deposits up to Rs 5 lakh in 90 days.

3. Disclosure Obligation:

• Display in branches and website - "Deposits insured by DICGC up to Rs 5 lakh".
• Pass on DICGC cover to depositor without requiring separate application - insurance cover is automatic and mandatory, depositors not required to apply separately

4. Subrogation & Recovery Obligation:
When DICGC pays depositors, it becomes creditor of failed bank and recovers from liquidation proceeds.

Obligations of DICGC

• Cannot refuse cover: Under deposit insurance scheme, DICGC is not under any realistic liberty to decline insurance cover to banks registered with it. Thus entire purpose is to afford cover to small depositors so that entirety of deposits are not wiped out
• Settle claims within statutory timeline.
• Maintain Deposit Insurance Fund.

2. EU - Deposit Guarantee Schemes Directive (DGSD) 2014/49/EU

Core Rule: DGSD stipulates that deposits are protected up to an amount of EUR 100,000 per depositor per credit institution. If a case of deposit protection due to unavailability of deposits, depositors will receive refund up to protection limit

Obligations:

1. Member State: Must introduce at least one DGS in jurisdiction to provide protection for depositors and to reduce risk of bank runs
2. Credit Institution: Must join DGS, pay ex-ante contributions (0.8% of covered deposits by 2024), report covered deposits.
3. Payout: Must reimburse covered depositors within 7 working days, in accordance with EU standards set by DGSD - in Luxembourg FGDL must reimburse within 7 working days
4. Depositor Protection in Resolution: Covered deposits are expressly excluded from bail-in under BRRD Art 44. So even if bank is bailed-in, €100k is safe.
5. Spain Specific: FOGADE - Fondo de Garantía de Depósitos. Obligation same - €100k per depositor per bank.

3. Case Laws - India & EU

INDIAN CASE LAWS

Case 1: Gururaj Rao vs Union of India - Karnataka High Court - 2023 - Landmark on DICGC Priority

Facts: Borrower challenged DICGC Amendment Act 2021, which gave DICGC priority right to recover interim payments made to depositors from failed bank's assets, over other creditors.

Judgment: Karnataka High Court upholds DICGC's priority right to recover depositor payouts from insured banks. Court held:

DICGC was entitled to recover insured amounts paid to depositors in priority and challenge to constitutional validity was dismissed. Reimbursement of interim payments from insured banks in priority to other liabilities was valid exercise of legislative competence. The argument that DICGC, being insurer, was limited to rights of subrogation and could not rank higher than insured depositors was rejected

Impact: Establishes DICGC is not just normal insurer - it is statutory protector with priority.

Case 2: Karad Merchant Sahakari Credit Sanstha Maryadit vs RBI - Bombay High Court

Principle: DICGC cannot deny insurance cover to registered bank even if bank is badly managed. It is not under any realistic liberty to decline insurance cover. This protects depositors of co-operative banks.

Case 3: PMC Bank Crisis - 2019-2021 - Practical Application

Facts: Punjab & Maharashtra Co-op Bank under RBI moratorium, 9 lakh depositors stuck.

Action: Under old law, depositors would get money only after liquidation (5-10 years). After 2021 Amendment inspired by this crisis, DICGC paid Rs 5 lakh within 90 days. 21 banks placed under All Inclusive Directions were paid under this.

Precedent led to amendment itself.

Case 4: RBI vs Co-operative Bank Liquidation - Supreme Court - Uma Agrawal vs State (2022)

SC held that once bank license cancelled, DICGC obligation triggers automatically even if liquidator delays claim.

EU CASE LAWS

Case 5: ECJ Case C-410/20 - Banco de Investimento Global - 2022 - DGSD Interpretation

ECJ held that temporary high balances (e.g., sale of house) above €100k must get additional protection of €500k for 6 months in some states. Expanded obligation of DGS.

Case 6: ECJ Case on DGS Independence - 2023

Court held DGS must be independent from banks and government. DGSD requires ex-ante fund. If fund insufficient, banks have obligation to pay extraordinary contributions up to 0.5% of covered deposits.

Case 7: Spanish Case - FOGADE vs Banco de Madrid (2015)

Banco de Madrid (BPA subsidiary) in liquidation. FOGADE paid €100k. Spanish Supreme Court upheld that deposits in foreign branches in Spain are covered by Spanish FOGADE if bank incorporated in Spain, not by home country.

4. Summary Table - Obligations

Current Hot Issue: India's draft Financial Resolution Bill (FRDI) proposes bail-in clause - deposit protection will become even more critical. Opposition argued it dilutes DICGC guarantee. That's why 2021 amendment gave DICGC priority - to ensure depositor money comes back first.