Bank Gone Bust? Don’t Worry, Your Account Is Insured*

Bank Gone Bust? Don’t Worry, Your Account Is Insured*

photo by Gaeten Lee

You might be aware of the recent rumor on the street regarding ICICI Bank and how people queued up at the bank/ATM to withdraw their money.

Customers queue up at an ATM of ICICI Bank in Hyderabad in the wee hours

Customers queue up at an ATM of ICICI Bank in Hyderabad in the wee hours.

There have been several instances of banks turning sick. As a result, it is the common man like you and me who despite having money in our account are unable to access it.

How much is insured?

In order to protect the small and marginal account holder, the Indian government has made it mandatory for banks to insure each account up to Rs. 1,00,000 (Rupees One Lakh).

Did you notice the asterix in the title? Yup, you got that – Conditions apply.

Here’s the condition – the insurance amount becomes payable ONLY when the bank goes into liquidation.

When does the bank go into liquidation?

Well, there’s no time frame for that because the Reserve Bank of India (RBI) tries to prevent the winding up of the bank and instead tries to revive it by granting protection, which often runs into years. So, this insurance protection does not really help and the account holder is left high and dry with neither his own money nor the insured amount.

Is this delay justified?

Certainly not, as per a recent ruling given by the National Consumer Disputes Redressal Commission on July 24, 2008, in the case of Reserve Bank of India v/s Eshwarappa & Anr. In Revision Petition No. 2528 of 2006 and other connected matters.

What happened in this case?

The Maratha Co-operative Bank Ltd. (MCB), Hubli, had run into trouble. The RBI granted protection to MCB by issuing a prohibitory under Section 35A of the Banking Regulation Act 1949. The order stated that from the close of business in 2004, MCB shall not, without prior approval in writing from the RBI, transact any business. Consequently, the account holders were not allowed to withdraw funds from their own accounts. Frustrated, several individual account holders filed separate complaints before the consumer forum against the MCB and the RBI.

The commission noted that the Deposit Insurance and Credit Guarantee Corporation Act (DICGC) provides insurance cover to small depositors, but this Act remains on paper because it is framed in such a way that the insurance cover would come into operation only in case of winding up or liquidation order. Since RBI neither permits the bank to operate nor does it pass a liquidation order, the whole purpose of extending insurance cover to small depositors is frustrated in the hope of reviving the bank.

The commission noted that while the RBI’s prohibitory order is binding on the bank, the pertinent question is whether it would be justifiable to continue the order beyond a reasonable time, given the hardship imposed on customers. The commission observed that the established law is that administrative powers are required to be exercised within a reasonable time so that they are not abused. The RBI has the duty to act as a watchdog of the finance and economy of the nation and act in the public interest and prevent the affairs of any bank being conducted in a manner detrimental to the interest of the depositors. A failure to do so would constitute a deficiency in service.

Relying on various decisions of the apex court, the commission held that where the law does not prescribe limitation, the court would import the concept of ‘reasonable time’.

If a bank cannot be revived within a reasonable time, the banking license should be cancelled and the bank should be ordered to be wound up. The DICGC must pay the amount covered by the insurance as soon as such liquidation order is passed without waiting further orders from the liquidator. Otherwise, it would be torturous to the poor depositors who may have to wait for years for the cumbersome procedure by which the liquidator crystallizes the amounts due to such depositor.

The commission directed that payment in accordance with the order of the consumer forum would have to be paid by the DICGC. However, if the bank is revived later, the amount paid by the DICGC may be recovered from the bank.

Bottom line…

This landmark judgement will help the small depositor to approach the consumer forum to recover claims of up to Rs. 1 lakh from the insurance coverage provided by DICGC. It is also hoped that the RBI will now do its duty so that depositors do not suffer.

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Author: Austin Comments: 0 comments Date: 6 Oct 2008
Categories: Banks Tags: , , , , , , , ,
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