How to get maximum Deposit Insurance (DICGC) Cover on deposits (over ₹ 1 lac) from a single Bank

[shivaprasad chhatre]

These days Punjab Maharashtra Co-operative Bank’s is in news for bad reasons. One would broadly be aware as to how a co-operative bank ranking number four in the Cooperative Banking Sector became almost bankrupt, overnight. 

At this stage issue of accountability of Bank’s concurrent and Annual/Balance Sheet Auditors, RBI annual inspection (AFI) would be discussed (for many months to come) with some action at a later date. I felt no one till now in public domain has touched certain aspects which are important for the depositors and public to know.

I thought in the interest of depositors’ community I can contribute a little by providing inputs on:

1. Insight of DICGC deposit cover (appended below & forms part of this post)
2. Long Term Deposits (actually bonds/debentures) issued by cooperative banks
3. Suggestions to provide relief to depositors and make the impact of these bank failures less severe/harsh to depositors and related.                                      

Public awareness will generate debate will compel the Govt and regulators to take proper action.

As you may know, even after the decision to liquidate Madhavpura Mercantile Bank taken by Govt and bank was de-licensed by RBI on 4 June 2012 till date many depositors whose outstanding are above one lac are not yet finally settled by DICGC. Under current circumstances, till RBI takes a final call on the PMC bank very small depositors would face financial hardship and uncertainty for years to come just to know their final fate, for no mistake of theirs. 

No doubt most of the bank depositors aware that their deposits with any licensed bank are covered under deposit insurance to the extent of ₹ 100000. This is at least from the safety angle. Whether this insurance protection is adequate and keeping revision pending even after a lapse of 8 years from Damodaran committee recommendations to RBI/Govt in the year 2011 is a different matter.

Notwithstanding the fact, settlement of claims under DICGC commences only after the bank is subjected to liquidation there are some other aspects which one can consider while depositing/investing money in bank deposits, so as to maximize the available insurance coverage.

Detailed inputs on DICGC will provide a legitimate/authentic way how to get maximum Deposit Insurance (DICGC) Cover from deposits with a single bank using well-documented example mentioned by DICGC deposits held in a different capacity and different right’. Less known Inputs DICGC needs to be properly understood so as to get best out of it.

I have also given a corollary as how one could apply this to existing deposit/s with any bank. Due to space constraint, I feel Newspapers will not like to publish such elaborate details hence better and quick way to communicate is WhatsApp.

Readers may kindly read carefully information especially related to DICGC cover (may not miss it) as it would help them for the future. Inputs on ‘LTD’ would certainly raise eyebrows.

                               How Depositors can maximize Deposit Insurance Cover

How to get maximum Deposit Insurance (DICGC) Cover from deposits with a single bank Or How one may enhance  DICGC cover for existing deposits over ₹ 1 lac with ‘the Bank’

If a set of family members wish to keep money in smaller banks (including licensed but non-scheduled cooperative bank and Scheduled Cooperative Bank), licensed small finance banks (including one yet to receive scheduled status) for a higher rate of interest yet wished it to be secured / safe, such people may consider following.  

Using legitimate trick below you may invest in weak PSU bank or in a co-op bank " or "Small Finance Bank" that may be offering higher interest returns.  I have purposefully not mentioned the name of payment banks as currently one cannot invest more than 1 lac in ‘CASA’ deposit with such banks and one cannot deposit money with them in Fixed Deposit. 

Please peruse page 8-9 (official reply of DICGC with an example, to a query No: 11) from DICGC booklet (extract given below). Only a few depositors (even members from bankers community) know this aspect.

Quote:

Q 11: What is the meaning of ‘deposits held in the same capacity and same right’; and ‘deposits held in a different capacity and different right’?

If an individual opens more than one deposit account in one or more branches of a bank, e.g. Shri S.K. Pandit opens one or more savings/current account and one or more fixed/ recurring deposit accounts etc., all these are considered as accounts held in the same capacity and in the same right. Therefore, the balances in all these accounts are aggregated and the maximum insurance cover is available up to rupees one lakh.

If Shri S.K. Pandit holds other deposit accounts in his capacity as a partner of a firm or guardian of a minor or director of a company or trustee of a trust or a joint account, say with his wife Smt. S. K. Pandit, in one or more branches of the bank then such accounts are considered as held in a different capacity and different right. Accordingly, such deposits accounts will also enjoy the insurance cover up to rupees one lakh separately.

It is further clarified that the deposit held in the name of the proprietary concern where a depositor is a sole proprietor and the deposit held in his individual capacity are aggregated and insurance cover is available up to rupees one lakh in maximum.

However, if individuals open more than one joint accounts in which their names are not in the same order, for example, A, B and C; C, B and A; C, A and B; A, C and B; or group of persons are different say A, B and C and A, B and D etc. then, the deposits held in these joint accounts are considered as held in the different capacity and different right. Accordingly, insurance cover will be available separately up to rupees one lakh to every such joint account where the names appear in different order or names are different 

Unquote:

All such money will be insured with DICGC (100% subsidiary of RBI) if you deposits of money based on the reply to the FAQ: 11 (above) in mind.

To elaborate further:

Say, a senior citizen (‘A’) has the following deposits in the name of self and his family two other members :

‘A’ singly (Rs) 100000,

A &B jointly (Rs) 100000,

A&B&C jointly (Rs) 100000,

A&C&B jointly (Rs) 100000.

In this case A’s deposit (single) as well as 3 deposits of ‘A’ jointly with others (he being the first depositor) each ₹ 10000, will entitle an sr citizen rate of interest, Also all deposits held in the names of  A+ A&B, A&B&C, A&C&B will be treated as  deposits held in different capacity and different right (and DICGC cover of ₹ 100000 will be available to each of the above combinations). Thus a person will get DICGC cover for ₹ 4 lacs and sr citizen interest rate

Further, if there are many deposits placed with the same bank between A, B and C (combinations of some or all such persons, even if such deposits are held in different/reverse order also) will be treated as deposits held in different capacity and different right and will qualify for separate DICGC cover of ₹ 1 lac each, per such combination.

There will be genuine doubt: How one could apply this to existing depositors with any bank.

One can be sure that till the time there are directions from RBI (like in case of PMC bank) or while the bank is under PCA one can legitimately apply to the bank to ‘add’ name of another depositor as the joint depositor. e.g ‘A’ has two deposits say ₹ 1 lac and ₹ 1.5 lacs respectively. 

While ‘A’ may continue to hold any of the deposits (in this case) on his single name, may advise the bank to add the name of ‘B’ as 2^nd joint depositor and also make it payable to ‘former or survivor’.

Thus the Interest /Tax status of the deposit  will not undergo a change but the 2^nd deposit that was hitherto not covered for DICGC will qualify for DICGC cover-up to limit of ₹ 1 lac (separate from A as sole holder), due to application of rule deposits held in a different capacity and different right’. This cannot be challenged denied as it fits in DICGC norm and perfect as per deposit policy of each bank which is based on model deposit policy of IBA. It is also consistent with RBI’s manual on deposits and old RBI’s master circulars on deposits.

A step further, even if a bank is under direction this ‘addition’ / ‘deletion’ of the name cannot be stopped as it is a permissible activity (falling outside the scope of the directions under Sec 35A). The Bank is subject continues to be a licensed bank and is acting on the legitimate instructions of the depositor. Similarly, where two deposits are held in the names of A and B,  the joint depositors may approach the bank to delete the name of 1^st or 2^nd depositor and make it singly held. This addition and deletion of names are perfectly legal so long as the event of liquidation is unknown to both insurer and the bank concerned.

The addition or deletion can also be as a result of the operation of law (settlement of death claim under nomination or survivorship) or otherwise. Applicability of this norm to a split of large deposit of individual/s followed by addition or deletion of name to the deposit/s, post-split, maybe point of specific judgment but legitimacy of earlier two cases cannot be questioned and DICGC cover cannot be denied to the above two cases of deposits modified, provided tenure, amount does not undergo a change.

Note:

As a matter of fact, like a time limit set for insolvency and Bankruptcy code there should upper time limit of say 3 years given to cooperative bank under directions like PMC bank (the case should not get dragged for years like Madavpura Mercantile Bank where depositors above ₹ 1 lac are yet to be made final settlement. Prolonged settlement of DICGC beyond reasonable time is unjust and does not in any manner reduce the hardship of gullible depositors. RBI needs to decide as a rule maximum time limit to be given to ailing banks (for the banks) to come out of the crises or face insolvency and let the DICGC do the rest. One must remember that bank under PCA or under directions like PMC bank (who may eventually get liquidated or merged) has to pay DICGC premium for all insurable liabilities for years till the bank’s fate is finally decided by Regulator/Govt and if such period happens to be 5-10 years (like Madhavpura Mercantile Bank Ltd) the DICGC premium eats the money of depositors who are on the verge of losing-out substantial portion.

Tier-II bond-like instruments (LTD) issued by many Coop Banks including (PMC) to gullible customers

It is mostly unknown to many that PMC bank has issued high risk ‘LTD’ product. Investors in LTD should forget getting money back. RBI’s directions to cooperative bank on issue of specific unrated loan/debt product to qualify for tier-II capital of such bank [mis-tiltled by RBI as Long Term Deposit (LTD)] are ‘pathetic’. It is a debt procurement instrument with several severe conditions about repayment attached to it. It is surrogate of bond/debenture by whatever name RBI may call it to be.

Considering the associated risk to investors/depositors (LTD product) I first took the matter RBI’s Legal and Coop Bank Regulation departments of RBI and after seeing no response (to my dozens of communications), I took the public interest matter with High Court of Bombay. After the reference of the honourable high court of Bombay to RBI based on my initiative, RBI hurriedly changed its directions*** issued in the year 2008 and issued an amendment to directions in the year 2015.  However even RBI’s modified ‘LTD’ guidelines to a major extent are very defective even now. Around that time I also made a clear reference (text can be shared) to SEBI but both RBI and SEBI tossed the matter to each other. After some time I stopped following up the matter. But in case of instances like PMC bank (above) and another co-op bank) mainly senior citizen category depositors/investors do suffer.

I think someone may write on the fate of LTD (Tier-II bond) holders of PMC bank (other banks like TJSB /Sarawat Coop Bank, who also issued them and marketed them vehemently, as it helped to augment tier-II capital), wherein main investments came from pensioners (these are actually retail bonds) or (debentures you may call like issued by corporate without SEBI’s approval).For various reasons one may clearly say that this LTD product is totally unregulated. The whole bond / ‘LTD’ issue, even today, is going on without following established law of the land (stamp Act, lack of existing route, nature of the instrument, listing, nomination rules, to name a few). In 2015-16 I perused ‘LTD’ documentation of PMC and found it just horrible. I had then taken up public interest matter with RBI, with the vague response from PMC bank.

You may notice observe that ‘LTD’ is a high-risk debt capital instrument issued by co-op banks. Several retired personnel are existing investors / called depositors (funds raised in future are going to be huge). It is not a deposit per se.

Probably, RBI is not still aware that it had entered the domain of SEBI and is actually permitting “private placement of a public issue” (a terminology not prevalent anywhere in the finance world) to the general public to whom it can be easily ‘mis-sold’. On the guise of simple investment avenue probably (inadvertently) promoting an illegitimate product. SEBI has banned retailing of tier-ii debenture/bonds by banks issuing offer document

It is a risky product as a popular Money market Product CBLO (which after my years of a long battle with RBI) that was withdrawn by RBI, silently. Both SEBI and RBI seem to now revisit this matter. Extract of my communication to SEBI & reply I received from SEBI can be shared.

***RBI issued DCB. BPD. MC 10/09.18.201 /2015-16 dt: 01-07-2015 modifying its original circular UBD.PCB.Cir No.4/09.18.201/-8-09 dt: 15-07-2008 (I have with me internal RBI correspondence, which I got under RTI)

Lastly, 

To aggressively address PMC like problems I appeal to RBI & Govt to consider the following:

1. Increase size withdrawal per depositor customer to ₹ 10,000 or to ₹ 25,000 (not ₹ 1000 as in most of the cases). This will reduce their hardship to some extent.
2. PSU/New Pvt Banks should also be subjected to this / similar stringent action (PSU Banks may not be excluded) instead of PCA
3. Other standalone options such as a change in Management/ key personnel etc to be explored first, wherever possible
4. Enhancing Insurance Cover: Presently eligible deposits to the tune of ₹ 1,00,000/- are covered under the DICGC cover. With the rise in general income levels resulting in an increase in the size of individual bank deposits, this ceiling of Rs 1,00,000/- was considered insufficient by RBI had appointed Damodaran Committee (who submitted its final report way back in the year 2011). It recommended RBI &  Govt that this cover should be raised to at least Rs 5,00,000/- so as to encourage individuals to keep all their deposits in a bank convenient for them. Now we are in 2019 it paltry cover of ₹ 100000. In the USA it is USD 100000.

Further, a strict ‘time limit’ should be stipulated to settle the DICGC insurance claims once the bank is de-licensed.

Till the time the cover is enhanced depositors/public should be well informed on matter How to get maximum Deposit Insurance (DICGC) Cover using different channels.

5. RBI may not give blanket approval for raising Tier-II bonds (in the form of ‘LTD’) as in case of PMC Bank. It may ensure clear directions about adding an important clause in offer document (altogether missing in case of PMC Bank, please refer annexure), advise banks correctly on the matter of nomination, direct banks on payment of proper stamp duty to this debt product (in due consultation with the stamp authority, missing in PMC bank’s case), and provide clarity on listing of these bonds issued as LTD, following norms on retailing of debt instruments (unless privately placed).

RBI should lay-down strict criteria to cap raising LTD/tier-II bonds which currently termed by RBI   as ‘LTD’.

RBI may revisit LTD its directions issued on DCB. BPD. MC 10/09.18.201 /2015-16 dt: 01-07-2015 by amending its directions UBD.PCB.Cir No.4/ 09.18.201/-8-09 dt: 15-07-2008, consequential to my approaching HC of Bombay and it’s communication to RBI.

6. Step up off-site and on-site inspection of large coop banks and reduce the periodicity and strict follow-up on compliance. RBI may set-up department for Coop banks inspection like DBS.
7. Depending on the time likely to taken by a regulated entity to address the regulatory concern, set appropriate period for restrictions 3 or 6 months and extend in 3-6 months period instead of 6 months each time.
8. Speedily consider exceptional cases of release of funds to depositors having serious medical problems based on merits of the case (within existing DICGC limits) based on restrictive criteria pre-fixed to be set off against the DICGC claim amount in case of the bank in subject to be liquidated.
9. It would be ideal if broad reasons for stringent directions are communicated to the public at large appropriately, so that rumour mills will be less active. RBI may also examine other options rather than ‘knee jerk’ action like this.

With more and more banks going to be set up after ‘on TAP’ licensing to small Finance, Payment banks etc there should be a proper mechanism to monitor these type of stringent actions.

I wish there is a need to highlight these matters to public at large, that would put public pressure on banking regulator and government and force them to have a debate before the customers of another bank face similar problem.

( Shivaprasad Laxman Chhatre)

Bavdhan,Pune 400021, Maharashtra

Land: 020 22947152 Cell: 981938011 

Discussions to this article

[Ganeshan Kalyani]

Nice topic chosen to pen down the article.

[Ganeshan Kalyani]

Excellent write-up. Nice suggestions given by you to avail the deposit insurance by valid methods whereby the savings invested will be rescuid. Insurance cover of ₹ 1 lac is really less. The limit as suggested by Damodaran Committe should be implemented. Further, your suggestion is apt as to why 6 months restriction period. Depending upon the case it should be 3 months or 6 months and not 6 months in all the cases.

Nice write-up Sir. Your sincere effort is really appreciable.

With you and your family a very Happy Dassehra!

[Ganeshan Kalyani]

Please read "with " as "Wish".