Will eligible insured depositors of banks that are under directions, moratorium qualify for an interim payment in 90 days from DICGC after amendments effective from 1st Sept 2021?

[shivaprasad chhatre]

The amendment has been made to the DICGC Act,1961 to provide interim payments to depositors subject to certain provisions stipulated in the DICGC (Amendment) Act,2001.

Earlier the claims submitted by the official liquidator (after the bank is de-licensed) on behalf of eligible depositors were paid by DICGC after due processing (whole process bank’s liquidation to settlement used to take many years) and there had been no provision of interim payments.

Efforts are made in this write-up to highlight the correct status of interim payment by DICGC to insured bank depositors, without getting too much into legal Jaron. Print media has been interchangeably using the terms ‘directions’ and ‘moratorium’.

Before highlighting the provisions, I wish to mention the difference between the issue of directions and granting moratorium by the Central Govt on the application of RBI

Section 35A(1) in BANKING REGULATION ACT,1949 grants powers to Reserve Bank of India (RBI) to issue directions to banking companies general­ly or to any banking company in particular for reasons specified in the section and the banking companies or the banking company, as the case may be, shall be bound to comply with such directions. RBI can extend the period of such directions from time to time.

Section 45 in BANKING REGULATION ACT,1949 grants power to RBI to apply to Central Government for suspension of business by a banking company and to prepare a scheme of reconstitution of amalgamation.

Central Government, after considering the application made by the Reserve Bank may make an order of moratorium staying the commencement or continuance of all actions and proceedings against the company for a fixed period on such terms and conditions as it thinks fit and proper and may from time to time extend the period so however that the total period of moratorium shall not exceed six months.

To provide interim relief mainly to thousands of Punjab Maharashtra Coop Bank depositors, the Deposit Insurance and Credit Guarantee Corporation (Amendment) Bill, 2021 was passed ensuring that insured account holders will get a maximum of ₹ 5 lakh within 90 days of RBI issuing any directions thereby imposing restrictions (under the provisions of the Banking Regulation Act, 1949), provided such directions imposing restrictions, prohibition, order or scheme provides for restrictions on depositors of such bank from accessing their deposits. Some of the provisions like 18A(1)(7) appear to have been framed specifically keeping PMC bank into account.

Further, this provision is made applicable prospectively to all cases if such order or scheme is made before the enactment of the Bill, but the business of the insured bank remains suspended at the time of enactment.

THE DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPORATION (AMENDMENT) ACT, 2021 NO. 30 OF 2021 was notified on behalf of MINISTRY OF LAW AND JUSTICE, Legislative Department EXTRAORDINARY PART II-Section 1 Gazatte of India  FRIDAY, AUGUST 13, 2021

*Relevant text from Gazattee is attached to benefit readers interested in perusing (annexure-1).

Finance ministry notification issued dt: 27-08-2021 states: "In exercise of the powers conferred by sub-section (2) of section 1 of the Deposit Insurance and Credit Guarantee Corporation (Amendment) Act, 2021 (30 of 2021), the Central Government hereby appoints the 1st day of September 2021, as the date on which the provisions of the said Act shall come into force from 01-09-2021”
As mentioned above Act provides bank depositors time-bound access to their insured deposit amount, in case they are restricted from accessing their bank deposits.
The provisions stated that the Corporation will be liable to pay the insured deposit amount to depositors on an interim basis.

Under the amended Act, the DICGC (Corporation) is liable to pay the insured deposit amount (as above) to depositors of an insured bank.  Such liability arises when an insured bank undergoes: (i) liquidation, i.e., sale of all assets on closing down of the bank, (ii) reconstruction or any other arrangement under a scheme, or (iii) merger or acquisition by another bank, i.e., transferee bank.  Once the Corporation makes the interim payment to the depositors, the liquidator or the insured or transferee bank (as the case may be) becomes liable to repay the same amount to the Corporation.  The amount paid by the Corporation in respect of a deposit reduces its liability against the deposit by that amount. 
Interim payment to depositors: The Bill clearly states that the Corporation will be liable to pay the insured deposit amount to depositors on an interim basis.  The liability will arise on the date the depositors are restricted from accessing their bank deposits.  This liability will arise if such restrictions get imposed under any order or scheme under the Banking Regulation Act, 1949.  This will also apply if such order or scheme is made before the enactment of the Bill, but the business of the insured bank remains suspended at the time of enactment.
 The Corporation will not be liable to make ‘the interim payment’ if: (i) the Reserve Bank of India (RBI) removes the restrictions put on the bank for payment to depositors, and (ii) the insured or transferee bank is in a position to pay the depositors without any restrictions.
 Once the Corporation makes the interim payment to a depositor, the value of his deposit in the insured bank will reduce by the amount paid.  The insured bank will then be liable to pay that amount to the Corporation.
 

Timeline for interim payment: Sec 18A(1), 18A(2), 18A(3), 18A(4) deal with the timelines.

It mandates the Corporation to pay the insured amount (subject to the limit as above) to the depositors within 90 days of the date such liability arises.  Within the first 45 days, the insured bank must furnish the details of all outstanding deposits to the Corporation.  Within 30 days of the receipt of details, the Corporation will verify the authenticity of the claims and check with each depositor if they are willing to receive the insured deposit amount.  Within 15 days of the verification, the Corporation must make the payment to such depositors.

The DICGC (Amended) Act also provides a mode of settlement of interim payments made by DICGC by the insured bank and interest penalties etc for the delay in repayment. 

Sec 18A (7) provides powers to extend this timeline by another 90 days under certain circumstances  (like finalizing a scheme for the reconstruction, arrangement, merger, or acquisition of the insured bank). In such a case, the DICGC (Corporation) becomes liable to pay the depositors during an extended timeline. 
 In the end, I wish to reiterate that this interim norm does not apply only to PMC bank but to all banks kept under directions of RBI (or bank under moratorium) where depositors are restricted from accessing their bank deposits. Further, interim payment norms may not apply to de-licensed bank/s and/or under liquidation.  On date as per my understanding, there are 100 odd such banks under directions under Sec 35A(1) of which in the majority of cases all depositors are restricted from accessing their bank deposits, except meager sums.

Shivaprasad Laxman Chhatre, Pune