Deposit Protection Scheme - Regulatory Structure

Deposit Protection is not charity - it is a statutory insurance that makes a bank deposit a secured claim.

1. Regulatory Structure - India

Statute: Deposit Insurance and Credit Guarantee Corporation Act, 1961 + DICGC General Regulations, 1961 framed by RBI under Sec 50(3).

Entity: DICGC is wholly owned subsidiary of RBI. Authorised capital Rs. 50 crore, fully subscribed by RBI. It came into existence in 1978 after merger of Deposit Insurance Corporation (DIC) and Credit Guarantee Corporation of India Ltd. (CGCI).

It is an arm of RBI, governed as special statutory regime, not ordinary commercial insurer.

Board: Governed by RBI, Chairman is Deputy Governor of RBI.

Coverage - Which Banks:

• All commercial banks - public, private, foreign banks operating in India
• Local Area Banks and Regional Rural Banks (RRB)
• Central, State and Urban Co-operative Banks - provided bank has opted for DICGC cover
• Not covered: Primary Cooperative Societies, NBFCs, Housing Finance Companies

What is insured:
All kinds of deposits - savings, fixed, current, recurring - principal + interest up to Rs. 5 lakh per depositor per bank as on date of liquidation / cancellation / moratorium.

Before Budget 2020 it was Rs. 1 lakh (from 1993). After PMC, Yes Bank, Lakshmi Vilas Bank crises, raised to Rs. 5 lakh. Covers 98.3% of all deposit accounts by number and 50.9% by value.

Premium: Banks pay premium to DICGC - currently 12 paise per Rs. 100 deposit per annum i.e. 0.12% - borne by bank, not depositor. If bank fails to pay premium, DICGC can cancel its registration.

Operations: Banks submit Form DI-01 showing premium calculation. DICGC maintains Deposit Insurance Fund.

2. Biggest Reform - DICGC (Amendment) Act, 2021

Old law: Depositor got money only after bank liquidation which took 5-10 years. PMC Bank depositors were stuck with Rs. 1,000 withdrawal cap from Sept 2019.

New law - Time-bound payout:

• If RBI imposes moratorium / All Inclusive Directions, liability arises immediately
• Within 45 days, insured bank must furnish details of all outstanding deposits to DICGC
• Within 30 days of receipt, DICGC verifies claims and checks with each depositor if willing to receive insured amount
• Within 90 days of moratorium date, DICGC must pay up to Rs. 5 lakh to depositor - interim payment without waiting for liquidation

This is called interim payment - depositors' first.

PMC case: DICGC eventually settled Rs. 3,791.55 crore main claim of PMC Bank for 8,47,506 traceable depositors after amalgamation into Unity Small Finance Bank. Under old law they would have waited years. Under new law, 21 banks including Rupee Coop, Kapol Coop got payout within 90 days.

3. Global Comparison

FDIC and FSCS are considered faster because they have direct access to failed bank data.

4. Detailed Case Laws

A. DICGC v. Ragupathi Ragavan - Civil Appeal No. 1035 of 2008 - Supreme Court Judgment dated 1 July 2015 - THE Lead Case

Facts: Bank under liquidation, Official Liquidator had Rs. 50 crore from asset sale. DICGC had paid Rs. 40 crore to insured depositors. Question: Who gets priority - DICGC or other preferential creditors like workmen, secured creditors?

Held: Supreme Court meticulously analyzed Section 21 of DICGC Act, 1961 - particularly Section 21(2). Held Section 21 creates mandatory, non-discretionary obligation that Liquidator MUST repay DICGC first before any distribution to depositors or other creditors.

"There shall not be any other preferential creditor who would be getting any amount from the Liquidator till the amount repayable is paid to DICGC"

Ratio: DICGC has first right to settle insured deposits and first right on amount realized by liquidated bank from its assets. This upholds recovery position. Purpose: If DICGC doesn't get priority, Fund will deplete and cannot protect next bank failure.

This judgment settled decades-old dispute and is quoted in every DICGC recovery.

B. DICGC Act Challenge - Constitutionality Upheld

Writ petition argued impugned provisions of DICGC Act giving priority to DICGC were manifestly arbitrary and violated Article 14.

Supreme Court dismissed appeal, held DICGC Act was enacted with laudable object of protecting small depositors and maintaining banking stability and impugned provisions had direct nexus with legislative purpose. Corporation functions under special statutory regime and was not merely an ordinary commercial insurer governed strictly by private law principles of subrogation.

C. Bharatmata Case - No Set-Off Allowed (Bombay HC, affirmed by SC)

Borrowers of credit societies argued: We have loan of Rs. 2 lakh and deposit of Rs. 1 lakh, so set off and DICGC should pay only balance.

Court rejected. Held liability of DICGC is to each depositor of bank under liquidation and up to extent of insured amount only, irrespective of borrower dues. Borrower must still repay full loan to Liquidator, deposit claim is separate. Sections 16,17,18 liability cannot be netted.

D. Karad Merchant Sahakari Credit Sanstha Maryadit v. RBI - Bombay HC 24 Feb 2014

Cooperative credit society challenged inclusion under DICGC and premium demand. Court held Section 16(1) provides DICGC shall be liable to pay every depositor of the bank an amount equal to amount due to him in respect of his deposit in that bank when order of winding up or liquidation is made. Cooperative banks are banks under Banking Regulation Act, hence covered.

E. PMC Bank Case - Judicial and Regulatory Learning

PIL in Bombay HC - Make BRA applicable to cooperative banks
After 2019 PMC scam where fraudulent exposure exceeded Rs. 10,000 crore, PIL sought directions to make Deposit Insurance and Credit Guarantee Corporation liable to pay depositors 100% of amount deposited in crisis-hit banks like PMC.

Court did not grant 100%, but observations led to 2021 Amendment. DICGC paid Rs. 3,791.6 crore but depositors above Rs. 5 lakh still lost excess. Amalgamation into Unity SFB was final resolution.

This case established that Rs. 1 lakh cover was wholly inadequate and forced Parliament to amend law.

F. Deposit Insurance Programme - Primary Cooperative Societies Not Insured

Shankariyas Parliament booklet clarified: Primary cooperative societies are NOT insured by DICGC. Many depositors of credit societies think they are protected - they are not. Only banks licensed by RBI with DICGC registration.

5. What Happens If Your Bank Fails Today? Step by Step

1. RBI imposes moratorium (like Yes Bank, PMC)
2. DICGC creates portal for claims, asks bank to submit depositor list within 45 days
3. You verify via Aadhaar + alternate account in another bank
4. DICGC pays up to Rs. 5 lakh within 90 days to alternate account via IMPS
5. If your deposit > Rs. 5 lakh, balance remains as claim against Liquidator - you become unsecured creditor for excess, will get pro-rata after DICGC recovery under Sec 21.

Tip: To maximize cover, split deposits across different banks - each bank has separate Rs. 5 lakh cover. In same bank, different branches are considered same bank, but joint accounts have separate cover per unique combination of holders.