Deposit Insurance and Credit Guarantee Corporation (DICGC)

Head Quater : Mumbai.

DICGC is a corporation setup by act of parliament.
(means it is not a company registered under companies act).

RBI completely owns DICGC.

RBI has 4 deputy Governors One of them functions as
the chairman of DICGC.

From the name, we can see it has two functions

1. Deposit insurance

2. Credit guarantee

Function1: Deposit insurance

=> You buy car insurance, so you’re protected against theft or accident of your car

=> But what about insurance of the money you’ve deposited in the bank account?

=> Yes, banks have to keep aside some money as ‘backup’, in CRR and SLR.

=> But still what if there is a massive crisis, nobody repays a single paisa of loan.Bank has to completely shut down its operation? (situation similar to American Subprime crisis)

=> What if bank itself involved in a massive fraud and RBI cancels its license.

=> In such cases, what is the guarantee that you’ll get back money from you savings/current/fixed deposit account?

=>To protect the bank customers in such scenario, government had enacted Deposit insurance Act in the 60s.

=> Under this act, every bank has to compulsorily take insurance from DICGC. (Just under Motor Vehicle act, it is compulsory to get car insurance.)

=> Every bank means every commercial bank (public, private, foreign bank), cooperative bank and regional rural bank (RRB).

=> So, when bank fails / shuts down- DICGC will give money to depositors (maximum 1 lakh per depositor).

=> Of course, money doesn’t fall from sky, if you get health insurance then you’ve to pay premium right?

=> Same way, Bank itself has to pay the premium to DICGC.(They cannot deduct this charge from your bank account or interest.) only then DICGC can come to rescue during crisis.

=> RBI can inspect the banks on DICGC’s behalf to make sure they’ve taken adequate precautions in running the bank.

First function is clear. Now the second function.

Function2: Credit guarantee

=> What if bank has given loan to a farmer but he cannot repay it because of the bad monsoon? And government also doesn’t come up with some debt waiver scheme?

Then banks will not give loans to farmers next time. Agriculture production will decline.

=> Therefore, DICGS also gives ‘guarantee’ to bank, So, if farmer doesn’t repay his loan, we’ll pay you (Bank) the loan money…this is credit guarantee, one type of insurance.

=> In 2014, Bharatiya Mahila bank announced they’ll give loans upto Rs.1 crore to female entrepreneurs, without any collateral.

=> Suppose, a lady businessman cannot repay the loan, then what will Mahila bank do? They cannot even attach her property (because loan given without collateral)!

=> But Mahila bank doesn’t need to worry because they’re given ‘credit guarantee’ by Credit Guarantee Fund Trust for Micro and Small enterprises (CGTMSE) fund is under MSME ministry. (and not this DICGC)