only a part of the total deposits is kept as cash in the bank safe.why is this so and how does this benefit the bank?
Answers
Answered by
2
In case of a bank failure, the proposed corporation will provide deposit insurance up to a certain limit, which has not been specified. Currently, bank deposits of up to Rs 1 lakh are insured but there are few banks that have failed in India in recent years as the Reserve Bank of India (RBI) has stepped in to work out a resolution plan without creating any risk for depositors.
The bill has suggested that the use of the ‘bail-in’ provision may result in cancellation of a liability, which could extend to bank deposits or could lead to modification of the terms or changing the form of the asset class. This provision would be last in the line for payments in case of liquidation.
The deposit insurance scheme currently covers all banks, commercial, regional rural and co-operative banks. So far in 2017, more thanRs 28 crore was sanctioned from the insurance scheme to all co-operative banks according to information on the DICGC website.
ADVERTISEMENT
“The present deposit insurance scheme will be subsumed by the new Bill, but the Rs 1 lakh deposit insurance amount will not change,’’ said Sandeep Parekh managing partner at Finsec Law Advisors. “To be precise, no commercial bank has been allowed to go down in India in the last 70 years and that implicit sovereign guarantee continues even with this new Bill.”
The bill proposes to establish a resolution corporation to monitor financial firms and oversee the liquidation, which was not the case in so far. The RBI which has been in charge of bank liquidations or resolutions will also no longer be in charge.
Once a financial services company, including a bank, slips into critical category, the resolution corporation will take over the firm and prepare a resolution plan during a year, which can be extended by another 12 months. The controversial provision of ‘bail in’ has been suggested, among various options, to resolve the stressed financial services companies. The other options include mergers, transfer of assets and liabilities to another entity, a bridge financial firm (where a new company is set up to take over the assets, liabilities and management as was the case with UTI), or liquidation via the National Company Law Tribunal.
The Parliamentary panel is expected to submit its report, which will be considered by the Union Cabinet before the Bill is tabled in Parliament again. But the plan has generated a lot of heat with bank unions as well as political parties criticising the move that has the potential to use deposits, beyond the insured amount, for reviving the bank.
The government hinted at reworking the provision. “Drafting is still on. A lot of corrections will take place,” finance minister Arun Jaitley told reporters after the Cabinet briefing.
The bill has suggested that the use of the ‘bail-in’ provision may result in cancellation of a liability, which could extend to bank deposits or could lead to modification of the terms or changing the form of the asset class. This provision would be last in the line for payments in case of liquidation.
The deposit insurance scheme currently covers all banks, commercial, regional rural and co-operative banks. So far in 2017, more thanRs 28 crore was sanctioned from the insurance scheme to all co-operative banks according to information on the DICGC website.
ADVERTISEMENT
“The present deposit insurance scheme will be subsumed by the new Bill, but the Rs 1 lakh deposit insurance amount will not change,’’ said Sandeep Parekh managing partner at Finsec Law Advisors. “To be precise, no commercial bank has been allowed to go down in India in the last 70 years and that implicit sovereign guarantee continues even with this new Bill.”
The bill proposes to establish a resolution corporation to monitor financial firms and oversee the liquidation, which was not the case in so far. The RBI which has been in charge of bank liquidations or resolutions will also no longer be in charge.
Once a financial services company, including a bank, slips into critical category, the resolution corporation will take over the firm and prepare a resolution plan during a year, which can be extended by another 12 months. The controversial provision of ‘bail in’ has been suggested, among various options, to resolve the stressed financial services companies. The other options include mergers, transfer of assets and liabilities to another entity, a bridge financial firm (where a new company is set up to take over the assets, liabilities and management as was the case with UTI), or liquidation via the National Company Law Tribunal.
The Parliamentary panel is expected to submit its report, which will be considered by the Union Cabinet before the Bill is tabled in Parliament again. But the plan has generated a lot of heat with bank unions as well as political parties criticising the move that has the potential to use deposits, beyond the insured amount, for reviving the bank.
The government hinted at reworking the provision. “Drafting is still on. A lot of corrections will take place,” finance minister Arun Jaitley told reporters after the Cabinet briefing.
Similar questions