Q. I am a 54-year-old professional working in a MNC and nearing retirement. I keep the majority of my savings in various small finance banks’ savings accounts which offer me high interest, typically near 7%. I was astonished to know that several banks in the USA have gone bankrupt recently. I wish to understand how Small Finance Banks are different from regular banks and whether I will receive any compensation in case the banks where I maintain my savings account goes bankrupt.
Avneesh Trivedi, Jaipur, Rajasthan
Small Finance Banks in India are a distinct type of bank category that was introduced by the Reserve Bank of India in consultation with the Government of India in 2014. They were launched with the intention of promoting financial inclusion by offering basic banking services to underserved and unserved populations, such as unorganised businesses, small and marginal farmers, and small business units.
All fundamental banking services, such as lending and accepting deposits, are provided by Small Finance Banks. The RBI released the Small Finance Banks rules in November 2014 following the statement made during the Union Budget for the fiscal year 2014–15. Only 10 of the nearly 72 applicants were eventually granted the Small Finance Bank licence. India’s first Small Finance Banks became operational in 2016.
Universal Bank vs. Small Finance Bank
Universal Banks both provide a broad range of financial services to their clients. Small Finance Banks, on the other hand, are a particular class of specialised bank that caters to the demands of a particular population demographic. They differ from Universal Banks in their focus as they focus on the underserved and unserved segment of the population.
Small Finance Banks are mandated to provide 75% of their Adjusted Net Bank Credit (ANBC) to priority sectors, whereas Universal Banks only extend 40% of their ANBC to priority sectors. This is a significant distinction between the two types of banks. Also, Small Finance Banks must open at least 25% of its branches in rural areas without access to banking services.
Insurance on savings accounts
For deposits opened with Scheduled Banks (including Universal Banks and Small Finance Banks), the RBI's subsidiary Deposit Insurance and Credit Guarantee Corporation (DICGC) provides insurance coverage on the deposits parked with banks. The insurance scheme provides insurance cover up to ₹5,00,000 per bank and depositor in the event a bank goes bankrupt. The schemes cover fixed deposits, savings accounts, recurring deposits, and current accounts. The DICGC coverage insures both the interest and the principal components.
Small depositors are the intended beneficiary of deposit insurance. Deposit insurance can be claimed only when a bank fails and has insufficient funds to pay back its depositors. Please see below key attributes of deposit insurance scheme:
- Subsidiary: DICGC,a fully owned subsidiary of the RBI, provides deposit insurance.
- Deposits Types:All bank deposits, including savings, fixed, current, and recurring deposits, are insured by the DICGC. The maximum amount per bank account per depositor is ₹5 lakhs.
- Coverage: If a person has more than ₹5 lakhs in net deposits with one bank, he or she is only eligible to receive ₹5 lakhs, including both the principal and interest.
- Banks Covered: All depositors of Universal Banks, Small Finance Banks and foreign banks that conduct business in India are covered by the DICGC's deposit insurance programme. Local area banks, regional rural banks, state, central, and urban cooperative banks are all included. For the insurance to be available to the bank's depositors, the bank must have purchased the cover from DICGC.
- Claim:Customers can seek insurance coverage of up to ₹5 lakhs and withdraw within this limit depending on the amount they have deposited with a bank in the event that a bank fails or does not permit withdrawal of deposits.
- Multiple Accounts: Currently, the insurance coverage provided by the DICGC covers all of a depositor's accounts held with various branches of the same bank. For all accounts, the maximum coverage is ₹5 lakhs. The insurance cap still stands at ₹5 lakhs for customers who have multiple accounts with the same bank (even if they are at different bank branches).
- Different BanksThe maximum amount of deposit insurance coverage is applied to various deposits in various banks separately. A customer who has accounts with SBI and HDFC Bank, for instance, will have separate insurance on each account for a maximum of Rs. 5 lakhs.
- Timeline: DICGC is required to pay the liquidator the claim amount of each depositor up to ₹5 lakhs within two months of the day it receives the liquidator's claim list in the event that a bank goes into liquidation. Each insured depositor's claim amount must be distributed by the liquidator in accordance with their claim amount.
Can any bank's deposit insurance coverage be revoked by the DICGC?
If an insured bank misses three premium payments in a row, the DICGC has the right to revoke its registration. Newspapers will inform the public in the event that the DICGC withdraws its coverage from any bank due to default in premium payment.
An insured bank's registration is revoked in the following situations: the bank is prohibited from accepting new deposits; the RBI cancels or refuses its licence; the bank is wound up, either voluntarily or involuntarily; the bank no longer qualifies as a banking company or a co-operative bank under Section 36A(2) of the Banking Regulation Act, 1949; the bank has transferred all of its deposit liabilities to another institution; or the bank merges with another bank. In the case that a bank's registration is cancelled, the bank's deposits are nonetheless insured up until the date of the cancellation.
Conclusion
The Indian economy and banking system at present is robust and the probability of banks going bankrupt is quite low. However, all depositors should be aware of their rights in case a bank goes bankrupt. DICGC covers all deposits up to a sum of ₹5 lakhs.
However, customers should remain vigilant and should from time to time update themselves about the financial position of their bank just to err on the side of caution. Customers can also distribute their money in savings accounts with multiple banks to ensure 100% coverage of their hard earned money.
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Note: This is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.
