November 28, 2012

MA0037 [Banking Related Laws and Practices] Set1 Q2

Q.2 Explain the significance of DICGC Act. Highlight the latest amendments to the act.

Ans: 

Legal Framework/Objective
The functions of the DICGC are governed by the provisions of 'The Deposit Insurance and Credit Guarantee Corporation Act, 1961' (DICGC Act) and 'The Deposit Insurance and Credit Guarantee Corporation General Regulations, 1961' framed by the Reserve Bank of India in exercise of the powers conferred by sub-section (3) of Section 50 of the said Act.

The preamble of the Deposit Insurance and Credit Guarantee Corporation Act, 1961 states that it is an Act to provide for the establishment of a Corporation for the purpose of insurance of deposits and guaranteeing of credit facilities and for other matters connected therewith or incidental thereto.

Organization and Functions
Management
The authorized capital of the Corporation is Rs.50 crore, which is fully issued and subscribed by the Reserve Bank of India (RBI). The management of the Corporation vests with its Board of Directors, of which a Deputy Governor of the RBI is the Chairman. As per the DICGC Act, the Board shall consist of, besides the Chairman, (i) one Officer (normally in the rank of Executive Director) of the RBI, (ii) one Officer from the Central Government, (iii) five Directors nominated by the Central Government in consultation with the RBI, three of whom are persons having special knowledge of commercial banking, insurance, commerce, industry or finance and two of whom shall be persons having special knowledge of, or experience in co-operative banking or co-operative movement and none of the directors should be an employee of the Central Government, or the RBI or the Corporation or a director or an employee of a banking company or a co-operative bank, or otherwise actively connected with a banking company or a co-operative bank, and (iv) four Directors, nominated by the Central Government in consultation with the RBI, having special knowledge or practical experience in respect of accountancy, agriculture and rural economy, banking, co-operation, economics, finance, law or small scale industry or any other matter which may be considered to be useful to the Corporation.

The Head Office of the Corporation is at Mumbai. An Chief Executive Officer is in overall charge of its day-to-day operations. It has four Departments, viz. Accounts, Deposit Insurance, Credit Guarantee and Administration, under the supervision of other Senior Officers. The Corporation had four branches, situated at Kolkata, Chennai, Nagpur and New Delhi. Out of these, the branches situated at Kolkata, Chennai and Nagpur were closed with effect from November 30, 2000, since almost all the banks have opted out of the Credit Guarantee Schemes, and most of the pending claims have been settled. While major items of work of these three branches were taken over by the Head Office of the Corporation, some residual items of work are vested with the DICGC Cells specially created in the Rural Planning & Credit Department of the Reserve Bank of India at the respective centres.

Deposit Insurance
Banks covered by Deposit Insurance Scheme

(I) All commercial banks including the branches of foreign banks functioning in India, Local Area Banks and Regional Rural Banks.

(II) Co-operative Banks - All eligible co-operative banks as defined in Section 2(gg) of the DICGC Act are covered by the Deposit Insurance Scheme. All State, Central and Primary co-operative banks functioning in the States/Union Territories which have amended their Co-operative Societies Act as required under the DICGC Act, 1961, empowering RBI to order the Registrar of Co-operative Societies of the respective States/Union Territories to wind up a co-operative bank or to supersede its committee of management and requiring the Registrar not to take any action for winding up, amalgamation or reconstruction of a co-operative bank without prior sanction in writing from the RBI, are treated as eligible banks. At present all co-operative banks, other than those from the States of Meghalaya and the Union Territories of Chandigarh, Lakshadweep and Dadra and Nagar Haveli are covered by the Scheme.

Registration of new banks as insured banks
Under Section 11 of the DICGC Act, 1961, all new commercial banks are required to be registered as soon as may be after they are granted licence by the Reserve Bank of India under Section 22 of the Banking Regulation Act, 1949.

Following the enactment of the Regional Rural Banks Act, 1976 all Regional Rural Banks are required to be registered within 30 days from the date of their establishment in terms of Section 11A of the DICGC Act, 1961.

Co-operative Banks - A new co-operative bank is required to be registered as soon as may be after it is granted a licence by the RBI.

A primary co-operative credit society becoming a primary co-operative bank is to be registered within 3 months from the date of its application for license.

A co-operative bank which has come into existence after the commencement of the Deposit Insurance Corporation (Amendment) Act, 1968, as a result of the division of any other co-operative society carrying on business as a co-operative bank, or the amalgamation of two or more co-operative societies carrying on banking business at the commencement of the Banking Laws (Application to Co-operative Societies) Act, 1965 or at any time thereafter is to be registered within three months of its making an application for licence.

However, a co-operative bank will not be registered, if it has been informed by the RBI in writing that a licence cannot be granted to it.

In terms of Section 14 of the DICGC Act, after the Corporation registers a bank as an insured bank, it is required to send, within 30 days of the bank's registration, an intimation in writing to the bank that it has been registered as an insured bank.

The letter of intimation, apart from the advice of registration and registration number, gives the details about the requirements to be observed by the bank, the rate of premium payable to the Corporation, the manner in which the premium is to be paid by the bank and the returns to be furnished to the Corporation etc. The insured bank has to submit its first return and remit the amount of premium within one month from the receipt of the letter, which is dispatched by Registered post or the date of commencement of business whichever is later. A copy of this letter is endorsed to the Reserve Bank of India and also National Bank For Agriculture and Rural Development (NABARD) in the case of Regional Rural Banks/State co-operative banks and District Central co-operative banks.

Latest Amendments
The Deposit Insurance and Credit Guarantee Corporation (DICGC) has reviewed its policy for settlement of claims of joint account holders in the event of liquidation of a bank. As per the revised policy the deposits held in two separate joint accounts in combination of say "A" and "B" and "B" and "A"; will now be treated as two separate accounts, and each category of the joint account will be eligible for a claim upto Rs. one lakh. Similarly, a joint account of "X", "Y" and "Z" will be treated as different from the joint account of "Y", "Z" and "X" or "Z". "X" and "Y", for the purpose of settlement of claims and claims in each category account will be paid upto Rs. one lakh. The policy has been revised in response to representations received from affected depositors. Often husband and wife having independent source of income maintained joint accounts for operational convenience. The revised policy is expected to bring relief to depositors who maintain such accounts.

It may be noted that deposits of all banks are insured upto Rs. one lakh. The DICGC pays insurance claims of depositors upto Rs. one lakh in the event a bank is taken for liquidation. So far, DICGC used to settle the claims of all joint accounts in "the same capacity and the same right" upto Rs. one lakh, for all combinations of the same set of depositors. This meant that joint accounts of "A" and "B" and "B" and "A" in the same bank were treated as one account and the claims were settled for only upto Rs. one lakh aggregating the balance in both accounts together. Thus, if a husband and a wife having independent sources of income opened two joint accounts for operational convenience as "A" and "B" and "B" and "A", their claim was payable only upto Rs. one lakh.

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