India Budget 2020: Bank scam victims are assured of ₹5 lakh instead of ₹1 lakh

  • Nirmala Sitharaman increased the guarantee that the government offers depositors as banks fail – from ₹1 lakh to ₹5 lakh.

  • This is the first time in 59 years that the government moved to increase deposit insurance, after 1961.

  • The Deposit Insurance and Credit Guarantee Corporation received total claims of ₹14,100 crore.
After the PMC bank crisis resulted in deaths and suicides of depositors, a lot of customers have been on the edge. The Finance Minister Nirmala Sitharaman today increased the guarantee that the government offers depositors as banks fail – from ₹1 lakh to ₹5 lakh.

“A robust mechanism is in place to monitor the health of all banks and the money of depositors are safe,” Sitharaman said in her Budget speech.

This is the first time in 59 years that the government moved to increase deposit insurance, after 1961. The five-fold increase is much higher than the market expectations of doubling deposit insurance offered by the government.

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A deposit insurance scheme is the government’s way of compensating small depositors. The rest of the money will have to be forfeited by the depositors in case a bank shutters down like in the case of PMC Bank, leaving thousands of customers in dire straits.

"Bank depositors get a shot in the arm with the upward revision in deposit insurance cover. While this could mean some expenditure for the Bank, this would certainly give comfort to retail savers," said R K Gurumurthy, head of treasury at Lakhsmi Vilas Bank.

Last month, the Deposit Insurance and Credit Guarantee Corporation received total claims of ₹14,100 crore after the PMC bank scam.

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Bank frauds had remained dormant for decades: RBI

After the scam, millions of customers across all co-operative banks have been worried as panic spread. This was compounded by the fact that the Reserve Bank also sounded an alarm in its financial stability report on the number of bank frauds.

In the first six months of FY20, as many as ₹2.6 lakh crore worth bank frauds were unearthed by the banking regulator. The report also said that some of these schemes have remained hidden from 2000-01 which was the time that the first dotcom bust occurred.

All this and the fall of large financial institutions like IL&FS and DHFL, exposed the many loopholes in the banking system. However, the government chose to expand its own guarantee of these troubled banks instead of taking penal action on the management of these institutions.
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