New India Bank failure: consumer body calls for amendment to DICGC Act

Mumbai: Mumbai Grahak Panchayat (MGP), a voluntary consumer organization, has called for amendments to the Deposit Insurance and Credit Guarantee Corporation (DICGC) Act, 1961, to better protect bank depositors. It has raised concerns over restrictions imposed on New India Cooperative Bank (NICB) and DICGC’s practice of reclaiming insurance payments from liquidated banks.

DICGC has said it will compensate eligible NICB depositors under Section 18A of the Act, provided the bank submits a claim list within 45 days, before Mar 30, 2025. The bank has sent messages to depositors asking them to file claims with valid identity documents and a cancelled cheque of an alternate bank account. The maximum coverage per depositor is Rs. 5 lakh.

The Reserve Bank of India (RBI) had placed NICB under strict restrictions, barring it from granting or renewing loans, making investments, or incurring liabilities without prior RBI approval. Depositors cannot withdraw funds, though term deposits can be renewed in the same name and capacity. These restrictions will be in place for six months from Feb 13, 2025, subject to review.

MGP has strongly objected to DICGC’s reclaiming of insurance payments from liquidated banks. "This provision is absurd and contrary to the principles of insurance. No insurer collects a premium and then demands repayment from the insured entity," said Shirish Deshpande chairman Mumbai Grahak Panchayat in a lettter to the finance minister. The organization argues that Section 21 of the DICGC Act and Regulation 22 unfairly prioritize DICGC’s repayment, preventing depositors with more than Rs. 5 lakh from recovering their excess deposits.

"DICGC is supposed to act as an insurer, not as a creditor. It is unacceptable that after a bank fails, the first priority is to repay DICGC instead of protecting depositors' full interests," MGP said in a statement. The organization also disputes DICGC’s justification of this provision based on a Supreme Court ruling, arguing that depositors’ rights are being compromised. "DICGC has thousands of crores in insurance funds. Why should they demand preferential repayment from failing banks while depositors suffer?" an MGP representative asked.

MGP has urged the Govt to amend Sections 16 and 17 of the DICGC Act to provide full insurance coverage on all bank deposits. "Why should depositors have to worry about losing their hard-earned savings? The current Rs. 5 lakh limit is inadequate," the organization stated. It has also demanded the withdrawal of DICGC’s Jan 30, 2025, circular and warned of legal action if Section 21 is not deleted.

"The faith of depositors in the banking system is at stake. We hope the Govt will take the necessary steps to reform the DICGC Act before it's too late," MGP stated. The organization’s demands add to the growing debate over deposit insurance regulations, increasing pressure on policymakers to address depositor protection concerns.

Bankers said that DICGC recovers claims to maintain the deposit insurance fund, ensuring its viability to protect depositors in other insured banks. This recovery also promotes financial discipline and accountability among banks, encouraging sound practices. Additionally, it ensures fairness by preventing prudent banks from subsidizing the losses of failed banks. While concerns exist about the fairness for depositors with large deposits, this recovery process is crucial to maintain the deposit insurance system's integrity and effectiveness, they said.


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