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Daily Current Affairs 11.10.2021 (A ‘Taiwan flashpoint’ in the Indo-Pacific, The many questions arising from QES data, What deposit cover overhaul means for you)

Daily Current Affairs 11.10.2021 (A ‘Taiwan flashpoint’ in the Indo-Pacific, The many questions arising from QES data, What deposit cover overhaul means for you)

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1.A ‘Taiwan flashpoint’ in the Indo-Pacific

In pursuing its Indo-Pacific strategy, India needs to be mindful of the China-U.S. equations in the region

If the rising confrontation between the United States and China erupts into a clash of arms, the likely arena may well be the Taiwan Strait. Taiwan is the unfinished business of China’s liberation under the Chinese Communist Party (CCP) in 1949. The Guomindang (KMT) forces under Chiang Kai-shek lost the 1945-49 civil war to the CCP forces under Mao Zedong. Chiang retreated to the island of Taiwan and set up a regime that claimed authority over the whole of China and pledged to recover the mainland eventually.

‘Strategic ambiguity’

The CCP in turn pledged to reclaim what it regarded as a “renegade” province and achieve the final reunification of China. Taiwan could not be occupied militarily by the newly established People’s Republic of China (PRC) as it became a military ally of the United States during the Korean War of 1950-53. It was described as an “unsinkable aircraft carrier” underscoring its strategic significance. This phase came to an end with the U.S. recognising the PRC as the legitimate government of China in 1979, ending its official relationship with Taiwan and abrogating its mutual defence treaty with the island.

Nevertheless, the U.S. has declared that it will “maintain the ability to come to Taiwan’s defence” while not committing itself to do so. This is the policy of “strategic ambiguity”. China, on the other hand, is committed to pursuing peaceful unification but retains the right to use force to achieve the objective. This is its own version of strategic ambiguity. The PRC has pursued a typical carrot and stick policy to achieve the reunification of Taiwan with the mainland. It has held out the prospect, indeed preference for peaceful reunification, through promising a high degree of autonomy to the island under the “one country two systems” formula first applied to Hong Kong after its reversion to Chinese sovereignty in 1997. According to this formula, Hong Kong would retain its free market system and its political and judicial institutions and processes for a period of 50 years, thus enabling an extended and gradual transition. The same was promised to Taiwan, but with the added assurance that it could also retain its armed forces during the transition period.

Economic links

With China itself adopting market-oriented reforms since 1978 and becoming, over a period of time, a significant economic and commercial opportunity globally, Taiwan business entities have invested heavily in mainland China and the two economies have become increasingly integrated. Between 1991 and 2020, the stock of Taiwanese capital invested in China reached U.S. $188.5 billion and bilateral trade in 2019 was U.S. $150 billion, about 15% of Taiwan’s GDP. By contrast the stock of Chinese capital invested in Taiwan is barely U.S. $2.4 billion although investments through Hong Kong may be considerable.

Taiwanese attempts to reduce the island’s economic exposure to China have not been successful so far. China hopes that the considerable economic benefits that Taiwan business and industry enjoy through a burgeoning relationship with China would weaken opposition to unification. By the same token, China is capable of inflicting acute economic pain on Taiwan through coercive policies if the island is seen to drift towards an independent status.

Taiwan’s politics

Taiwan has two major political parties. The KMT, dominated by the descendants of the mainlanders who came to the island along with Chiang Kai-skek in 1949, remains committed to a one-China policy and does not support the independence of Taiwan. The Democratic Progressive Party (DPP), on the other hand, is more representative of the indigenous population of the island, and favours independence.

However, faced with aggressive threats from China and lack of international support, the demand for independence has been muted. China feels more comfortable with the KMT and is hostile to the DPP. Ever since the DPP under Tsai Ing-wen won the presidential elections in 2016, China has resorted to a series of hostile actions against the island, which include economic pressures and military threats. These actions have escalated since the re-election of Tsai Ing-wen in the 2020 elections. Public opinion swung in her favour as China adopted a series of hardline policies in Hong Kong, abandoning the ‘One Country Two Systems’ formula promoted by Chinese leader Deng Xiaoping. China could no longer pretend that the model was relevant in any sense to Taiwan’s future under Chinese sovereignty.

One important implication of this development is that prospects for peaceful unification have diminished. Sentiment in Taiwan in favour of independent status has increased. The escalating military threats against Taiwan, through daily violations of its air defence identification zone (ADIZ) and aggressive naval manoeuvres in the Taiwan Strait are currently deterrent in nature, aimed at heading off any move towards independence and its closer military relationship with the U.S.

The U.S. stance

While the U.S. does not support a declaration of independence by Taiwan, it has gradually reversed the policy of avoiding official-level engagements with the Taiwan government. The first breach occurred during the Donald Trump presidency when several senior officials, including a cabinet-level official, visited the island. The Joe Biden officials have continued this policy. The Taiwanese representative in Washington was invited to attend the presidential inauguration ceremony (Biden), again a first since 1979. Reports have now emerged that U.S. defence personnel have been, unannounced, training with their Taiwanese counterparts for sometime. In a new incident last week, a U.S. nuclear-powered submarine reportedly ran into an “unidentified object” while in the South China Sea. China has objected to these U.S. actions vociferously.

The latest statement by Chinese President Xi Jinping on Taiwan on October 9, on the eve of Taiwan’s national day, responds to these developments. Mr. Xi said that unification should be achieved peacefully but added that the Chinese people have a “glorious tradition” of opposing separatism. Mr. Xi added, “The historic task of the complete reunification of the motherland must be fulfilled and will definitely be fulfilled.”

These statements are somewhat less aggressive and impatient than his earlier ones on Taiwan. This may be related to the recent telephone conversation between President Joe Biden and Mr. Xi when Mr. Biden reportedly assured Mr. Xi that the U.S. would abide by the “Taiwan agreement”, that is, the U.S. would not overturn its one China policy.

Is China prepared to carry out military operations to invade and occupy Taiwan?

In March this year, the U.S. Pacific Commander, Philip Davidson, warned that China could invade Taiwan within the next six years as part of its strategy of displacing U.S. power in Asia. He appeared to suggest that Chinese military capabilities had been developed in order to achieve this objective. Other analysts argue that cross-strait operations would be extremely complex and pacifying a hostile population may prove to be long drawn out and costly. China may, therefore, be content to head off Taiwan independence while continuing to build its capabilities and await a further relative decline of U.S. power and its will to intervene in the defence of Taiwan.

Impact of alliances

These calculations may be upset by accident or miscalculation, and the recent submarine incident is a warning in this respect. The recent crystallisation of the Quad, of which India is a part, and the announcement of the Australia-U.K.-U.S. alliance, AUKUS, with Australia being graduated to a power with nuclear-powered submarines, may act as a deterrent against Chinese moves on Taiwan.

But they may equally propel China to advance the unification agenda before the balance changes against it in the Indo-Pacific.

For these reasons, Taiwan is emerging as a potential trigger point for a clash of arms between the U.S. and China.

In pursuing its Indo-Pacific strategy, India would do well to keep these possible scenarios in mind.

The US is banding together with nations like India, Australia, Japan and South Korea to ensure that the sovereignty of Indo-Pacific nations is protected. The United States has bolstered its military presence in the South China Sea and has put nations around the world on notice that the sale of key infrastructure and technology companies to China threatens their national security. China claims almost all of the strategic South China Sea with Brunei, Indonesia, Malaysia, the Philippines, Taiwan and Vietnam pushing competing claims to parts of the resource-rich maritime region. The United States, Japan and India do not have any territorial claims in the sea but want to ensure freedom of navigation there.

The Concept of ‘Indo Pacific’

  • First time, the term ‘Indo Pacific’ was used by the Japanese Prime Minister Shinzo Abe on Indian soil in 2007. Then, he said that there is a connect between the Indian Ocean and the Pacific Ocean.
  • After about ten years, the President of the United States used this term during his visit to East Asia. He repeatedly used this term instead of ‘Asia Pacific’. The motive is to ensure that all the countries in the region are working in a direction to make it an open, free, inclusive, prosperous and rule based Indo Pacific system.
    • China is giving a tough competition to U.S in all sectors. In the trade war with China, U.S. wants to pump up as much as banding together of other nations as possible.
  • India considers two important aspects within the scope of this term:
    • One, centrality of the ASEAN (Association of Southeast Asian Nations), which is necessary to take forward the notion of Indo-Pacific.
    • Second, respect for international laws, especially the United Nations Convention on Law of the Sea, 1982 (UNCLOS) at the time of disputes, particularly over the South China Sea.

Significance of the Indo Pacific Region

  • It is a very rich region in terms of natural resources (fisheries, oil, gas) as well as mineral resources.
  • About 3.5 trillion dollars international trade flows through the South China Sea.
  • Trade of some of the major economies like China, Japan, Korea or the west coast of the United States goes through the South China Sea.
  • About 50% of India’s trade is conducted through the South China Sea.

India’s Role in the Indo Pacific Region

  • India has been one of the major players in the region. India conducts many naval exercises with the United States, countries of ASEAN, Japan, Korea and Vietnam.
  • Last time in 2015, with the United States, India issued a strategic vision for the Indian ocean and the Pacific, in which maintaining the security in the South China Sea, was also mentioned.
  • ONGC Videsh Ltd is prospecting for oil and gas in the exclusive economic zone of Vietnam. India imports 82% of its oil. It needs oil from wherever it can get. Therefore, explorations at the South China Sea is very important for it.
  • The international community including India wants freedom of navigation, freedom of over flights in the region, especially the South China Sea.

Claims Made by China in the South China Sea

  • The Chinese regime claims that it has historical ownership over nearly the entire region, which gives it the right to manufacture islands, declare defensive perimeters around its artificial islands, and to chase ships from other nations out of the South China Sea. The International Court of Arbitration rejected the claim in 2016.
  • China considers disputes in the South China Sea as territorial disputes and therefore considers that UNCLOS does not have a locus standi to pass the judgement over disputes.

What other littoral countries in the dispute are doing to counter China?

  • It was Phillipines only that took the case to the International Court of Arbitration in 2016. But it has been seen recently that it is ready to provide its islands to China provided China invests in its region.
  • None of the states in dispute is willing to or is capable of confronting China.
  • Economically, China is leading the region. Also, in general, China has a record of making countries fall into line with it either through warnings or by giving bribe in the form of investment.

Should India collaborate with US in the South China Sea?

  • To show its presence and to not allow China to do which is not as per the UNCLOS, it is necessary for India to have its ships in the South China Sea.
  • Participating in the exercises like Malabar that desist China from doing something unconventional.
    • The Malabar exercise started in 1992 as a bilateral one between the Indian Navy and the US Navy in the Indian Ocean. Japan became a permanent member of the Malabar exercise in 2015.
  • India shall not get sucked in with US, but rather have more and more naval exercise in other countries’ seas in their respective exclusive zones, close to the areas in the South China Sea which China claims.
  • India’s assets are not that large to be there permanently in the sea but in the name of maritime exercises, it can show its presence there to the world.

India needs to have maritime alliances like Quad (India, Australia, the US and Japan) with different countries including US to protect its interests in the South China Sea without provoking China.

Taiwan

  • Taiwan – the Republic of China (ROC), home to twenty-three million people, is an island off the southern coast of China that has been governed independently from mainland China since 1949.
  • Its neighbours include China (officially the People’s Republic of China, PRC) to the west, Japan to the northeast, and the Philippines to the south.
  • Taiwan is the most populous state that is not a member of the United Nations and the largest economy outside the UN.
  • Taiwan is Asia’s 5th largest economy.
  • It is a global leader in chip manufacture and the second-largest manufacturer of IT hardware, etc.
  • China’s Claim: The People’s Republic of China (PRC) views the island as a province, while in Taiwan—a territory with its own democratically elected government—leading political voices have differing views on the island’s status and relations with the mainland.
  • China and Taiwan maintain a fragile relationship, which has improved during the past seven years but is periodically tested.

2.The many questions arising from QES data

The Quarterly Employment Survey for the April-June quarter throws up some perplexing numbers

The Labour Bureau released the results of the All-India Quarterly Establishment-based Employment Survey (QES) for the first quarter (FQ) of 2021 (April to June). The survey covers establishments employing 10 or more workers in the organised segment in nine sectors (manufacturing, construction, trade, transport, education, health, accommodation and restaurants, IT/BPO, and financial service activities). These sectors account for 85% of the total employment in establishments employing 10 or more workers as per the Sixth Economic Census (EC), which serves as the basis of the QES survey. The data for QES were collected either telephonically or through visits. The report cautions that “verification of records has not been resorted to for collection of data”. This could have significant implications for the statistics generated from the survey. While the QES provides a demand side picture, the National Sample Survey or Periodic Labour Force Survey (PLFS) gives the supply side picture of the labour market.

The stated objective of the QES is to enable the government to frame a “sound national policy on employment”. India ratified the International Labour Organization’s Employment Policy Convention, 1964, which requires the ratifying countries to implement “an active policy designed to promote full, productive and freely chosen employment.” India does not have one till now.

The PLFSs have not presented an encouraging picture of the labour market. The CMIE has been projecting a distressed labour market scenario, especially during the pandemic. Notwithstanding criticisms, the CMIE database has dominated the analyses and understanding of the labour market. This could be quite irksome to any ruling party. Thus, the government needed an ‘official’ database that projects a rosy picture of the economy and the labour market (remember the controversy over the release of the PLFS results in 2019, which showed the highest-ever unemployment rate of 6.1%). The government has also been using the payroll data periodically to show formal employment generation and/or recovery in employment during the pandemic. It is not surprising that the QES has reported a simple growth rate of 29% in employment in FQ2021 over 2013-14 (Sixth EC).

Data that raise eyebrows

However, strangely, the QES provides very broad employment figures — “3 crores and 8 lakhs approximately” in FQ-2021 against a total of 2 crores and 37 lakhs in these sectors taken collectively [in 2013-14]”. By any reckoning, these are impressive statistics. But let us put these figures in perspective. Between the Fifth EC (2005) and the Sixth EC (2013), employment grew by a simple growth rate of 38.13%. And between the Fourth EC (1998) and Fifth EC (2005), it grew by 21.13%.The compound annual growth rate (CAGR) — a far more reliable indicator of growth rates spanning several years — between the two is 4.12%. The approximate CAGR between the 6th EC and FQ2021 is 3.33%.

The remarkable simple growth rate reported above compares a normal period to a pandemic-ravaged period. The overall growth rate is incongruent with macro-economic factors and other labour market portrayals. The CMIE data revealed a rather discouraging picture in April as the salaried class shed an estimated 3.4. million jobs from the level in March 2021 and the urban unemployment rate was as high as 9.78%. Further, normal economic indicators like income growth rates, capacity utilisation, business confidence, aggregate demand measured by the Purchasing Managers’ Index and the Reserve Bank of India’s growth rates of high-frequency indicators during the pandemic did not show encouraging trends even though they were fluctuating. The provisional estimates of annual national income for 2020-21 showed contraction in manufacturing (-7.2.%), construction (-8.6%) and trade (-18.2.%), which are some of the sectors covered in QES. The real national income growth rates, though controversial for upward revisions, declined 2017-18 onwards — the annual average growth rate in 2013-14 to 2020-21 was 4.95%. Are we talking of employment growth despite economic slowdown – from jobless growth to job-loss growth to growthless job growth?

Various surveys and reports, including those by the Central government, showed that the smaller establishments suffered much more than the bigger industries. This was surely more so during the more extensive lockdown period, April-June 2020, when they faced challenges concerning debt repayment, wage/salaries and statutory dues. They are also least likely to have permanent workers on their payroll. Given that nearly 75% of the estimated establishments employed less than 40 workers, as reported in the QES, one wonders about the credibility of two statistics reported in the report. One, that 87.5% of the estimated workers were regular workers and just about 2.1% (12.5% in construction) were casual workers. Two, even though excluding health and financial services, around 24-35% of the establishments were operational from March 25 to June 30, 2020, 66-86% of estimated employees received full wages including in the construction, trade and hospitality industries. We should treat these statistics as claims by employers rather than reliable data.

The report throws up another perplexing statistic. It says contract workers accounted for 0.7% (IT/BPOs), 10.4% (manufacturing) and 17.6% (construction) and overall a measly 7.8%. According to the Annual Survey of Industries for 2017-18, 36.37% of the total workers are employed in the organised factory sector. However, the reported contra-statistics in QES are plausible because given the low employment demand, cost-minimising manufacturers would be more likely to engage permanent and possibly unionised and high-skilled workers while the flexible category workers will have to queue up for employment till better times come. On the flip side, the report concedes a decline in the share of female workers from 31% in the Sixth EC to 29% in FQ2021. Like the Sixth EC, it could have collected data on social aspects like caste and religion as the pandemic would have had differential impacts on social statuses of workers. The data on the formalisation of establishments as revealed by registration under the laws must take care of two aspects. One, there could be overlaps between the registrations (say, factories or shops registering under more than one law). Two, since this is an employment survey, it is relevant to consider labour laws under which the establishment can be registered like the Factories Act, Shops Act or the Building and Other Construction Workers Act and employ workers rather than including tax laws as QES does.

A starting point

We need to wait for unit level data to generate data at the disaggregated levels and create cross-tabulations to understand the labour market dynamics much better than the ratios released in this report. At any rate, the F12021 QES must be considered as a starting point of the new data set rather than as a continuum of the Sixth EC as the Seventh EC would enable sensible comparisons. Finally, it is baffling why the Labour Bureau has initiated five segmented employment surveys when it could have put in place a high-frequency labour market information base like most advanced economies.

Introduction

Considering the importance of availability of labour force data at more frequent time intervals, National Statistical Office (NSO) launched Periodic Labour Force Survey (PLFS) in April 2017.

The objective of PLFS is primarily twofold:

  • to estimate the key employment and unemployment indicators (viz. Worker Population Ratio, Labour Force Participation Rate, Unemployment Rate) in the short time interval of three months for the urban areas only in the ‘Current Weekly Status’ (CWS).
  • to estimate employment and unemployment indicators in both ‘Usual Status’ (ps+ss) and CWS in both rural and urban areas annually.

On the basis of the data collected in PLFS, three Annual Reports of PLFS corresponding to the periods July 2017 – June 2018, July 2018 – June 2019 and July 2019 – June 2020 covering both rural and urban areas giving estimates of all important parameters of employment and unemployment in both usual status (ps+ss) and current weekly status (CWS) have been released.

Besides these Annual Reports, eight Quarterly Bulletins of PLFS corresponding to the quarters covered during the period December 2018 to September 2020 have already been released. In these quarterly bulletins estimates of labour force indicators, viz., Worker population ratio (WPR), Labour Force Participation Rate (LFPR), Unemployment Rate (UR), distribution of workers by broad status in employment and industry of work in the Current Weekly Status (CWS) for urban areas have been presented.

The present Quarterly Bulletin in the ninth in the series for the quarter October- December 2020.

Sample Design of PLFS

A rotational panel sampling design has been used in urban areas. In this rotational panel scheme, each, selected household in urban areas is visited four times, in the beginning with ‘First Visit Schedule’ and thrice periodically later with a ‘Revisit Schedule’. The scheme of rotation ensures that 75% of the first-stage sampling units (FSUs)[1] are matched between two consecutive visits.

Sample Size

At the all-India level, in the urban areas, a total number of 5,563 FSUs (UFS blocks) have been surveyed during the quarter October – December 2020. The number of urban households surveyed was 43,693 and number of persons surveyed was 1,71,553  in urban areas.

 Conceptual Framework of Key Employment and Unemployment Indicators for the Quarterly Bulletin: The Periodic Labour Force Survey (PLFS) gives estimates of Key employment and unemployment Indicators like the Labour Force Participation Rates (LFPR), Worker Population Ratio (WPR), Unemployment Rate (UR), etc. These indicators, and the and ‘Current Weekly Status’ are defined as follows:

  1. Labour Force Participation Rate (LFPR): LFPR is defined as the percentage of persons in labour force (i.e. working or seeking or available for work) in the population.
  2. Worker Population Ratio (WPR): WPR is defined as the percentage of employed persons in the population.
  3. Unemployment Rate (UR): UR is defined as the percentage of persons unemployed among the persons in the labour force.
  4. Activity Status- Current Weekly Status (CWS): The activity status determined on the basis of a reference period of last 7 days preceding the date of survey is known as the current weekly status (CWS) of the person.

3.What deposit cover overhaul means for you

Recent amendments to DICGC Act promise to fix the ineffectual mechanism

As interest rates have plunged to new lows in the last couple of years, depositors seeking regular income have been caught between a rock and a hard place. If they prioritise safety of principal and go with leading banks or NBFCs, they are forced to settle for interest rates of 5-5.5% that barely match inflation. Seeking higher rates with new private sector banks, cooperative banks or less-known NBFCs means exposing their principal to risks, with defaults by Dewan Housing Finance and RBI restrictions on depositors of PMC Bank, Yes Bank and Lakshmi Vilas Bank playing on one’s mind.

Recent changes to India’s deposit insurance laws make life a little easier for depositors with banks.

Deposit insurance before

Until February 2020, if any commercial bank or cooperative bank failed in India and had its licence cancelled by the RBI, depositors were eligible to receive an insurance payout of up to ₹1 lakh covering all the accounts held by them. The insurance limit was hiked to ₹5 lakh per individual per bank in February 2020. The insurance amount was to be paid by DICGC (Deposit Insurance and Credit Guarantee Corporation) within two months of it’s receiving a list of verified claims from the bank’s official liquidator. In practice though, there was many a slip between the cup and the lip.

For one, the insurance amount became payable only if a bank was officially ordered to be liquidated by the RBI. However, in many cases, the RBI’s first move on perceiving weak financials or dodgy governance was to impose ‘directions’ on a shaky bank which restricted withdrawals by depositors to arbitrary sums of ₹1,000 to ₹10,000.

While these directions were quickly withdrawn in the case of high-profile commercial banks such as Yes Bank or Lakshmi Vilas Bank, they have lasted for many years in the case of some cooperative banks. Even today, there are several cooperative banks where depositor money is stuck because they’ve been under directions for over a decade!

Two, even in cases where the RBI had passed final orders for liquidation, the official liquidator could take months to compile a list of eligible-depositor claims and hand them over to the DICGC, resulting in a multi-year wait for depositors to get their insurance money. Data in DICGC’s annual report shows that in FY20 it took 508 days on an average for depositors of liquidated banks to get their claims, with the number at 1,425 days in FY19.

What has changed

Recent amendments to the DICGC Act, which were passed by Parliament in August and took effect from September 1, promise to fix this ineffectual deposit-insurance mechanism.

The new Act makes DICGC liable to pay bank depositors their insurance amount of up to ₹5 lakh as soon as the RBI places the bank under its ‘directions’ or restricts their withdrawals in any way.

Thanks to this change, bank depositors will not need to cool their heels for many years, with limited access to their money, while the bank or other authorities experiment with rescue packages before finally deciding to wind up a bank. The onus for paying depositors moves to DICGC, an RBI subsidiary, instead of resting with the troubled bank’s administrator.

The Act crunches the timelines within which depositors can hope to get their hands on the insurance money. Within 45 days of the RBI passing directions on a bank, it is required to furnish a full list of depositors and their claims to DICGC. The DICGC is required to verify the details online within 30 days of receiving this and credit the insurance money within 15 days. Overall, DICGC is now required to settle depositor insurance claims within 90 days of a bank being placed under RBI directions.

If the RBI is working on a merger or takeover of the ailing bank, it can ask the DICGC to extend this repayment schedule by another 90 days.

Your FD strategy

The above overhaul of deposit insurance has implications for you, even if you don’t have money stuck in a cooperative bank that is under the RBI’s directions.

The new rules place commercial banks, small finance banks and cooperative banks on an equal footing with respect to insurance cover. Should the bank get into trouble, you’ll be eligible to receive insurance of up to ₹5 lakh across all your accounts in it.

If you’ve so far been investing only with scheduled commercial banks and have stayed away from small finance banks or cooperative banks for deposits, you can expand your horizons now. However, small finance banks, which are tightly regulated and wholly under RBI’s ambit, are still far safer bets than cooperative banks which are partly regulated by the State governments. To make the most of insurance, it would be best to cap your deposits in riskier private banks or small finance banks at ₹5 lakh each.

If you’re unhappy with the rates from top-rated NBFCs, private sector or small finance banks that offer higher rates, which enjoy deposit insurance upto ₹5 lakh offer a better alternative now. No matter how attractive the rates offered by others, it remains best to park your emergency fund and temporary windfalls in post office schemes and systemically important banks (SBI, HDFC Bank and ICICI Bank).

Background

Recently, the Union Cabinet has cleared the Deposit Insurance and Credit Guarantee Corporation (DICGC) Bill, 2021.

  • The failure of banks such as Punjab and Maharashtra Co-operative (PMC) Bank, Yes Bank and Lakshmi Vilas Bank reignited the debate on the low level of insurance against the deposits held by customers in Indian banks.

Note

  • Deposit Insurance: It is a protection cover against losses accruing to bank deposits if a bank fails financially and has no money to pay its depositors and has to go in for liquidation.
  • Credit Guarantee: It is the guarantee that often provides for a specific remedy to the creditor if his debtor does not return his debt.

Key Points

  • Coverage:
    • The bill will cover 98.3% of depositors and 50.9% of deposit value in the banking system, way above the global level of 80% and 20-30%, respectively.
    • It will cover all types of banks, which also include regional rural banks and co-operative banks.
    • It will cover banks already under moratorium and those that could come under moratorium.
      • Moratorium is a legally authorized period of delay in the performance of a legal obligation or the payment of a debt.
  • Insurance Cover:
    • It will provide funds up to Rs 5 lakh to an account holder within 90 days in the event of a bank coming under the moratorium imposed by the Reserve Bank of India (RBI).
      • Earlier, account holders had to wait for years till the liquidation or restructuring of a distressed lender to get their deposits that are insured against default.
      • The Rs 5-lakh deposit insurance cover was raised from Rs 1 lakh in 2020.
        • The Damodaran Committee on ‘Customer Services in Banks’ (2011) had recommended a five-time increase in the cap to Rs. 5 lakh due to rising income levels and increasing size of individual bank deposits.
    • Within the first 45 days of the bank being put under moratorium, the DICGC would collect all information relating to deposit accounts. In the next 45 days, it will review the information and repay depositors within a maximum of 90 days.
  • Insurance Premium:
    • It permits raising the deposit insurance premium by 20% immediately, and maximum by 50%.
      • The premium is paid by banks to the DICGC. The Insured banks pay advance insurance premiums to the corporation semi-annually within two months from the beginning of each financial half year, based on their deposits as at the end of previous half year.
    • It has been raised from 10 paise for every Rs 100 deposit, to 12 paise and a limit of 15 paise has been imposed.
    • This is only an enabling provision and the determination of an increase in the premium payable would involve consultations with the RBI and require government approval.

Deposit Insurance and Credit Guarantee Corporation

  • About:
    • It came into existence in 1978 after the merger of Deposit Insurance Corporation (DIC) and Credit Guarantee Corporation of India Ltd. (CGCI) after passing of the Deposit Insurance and Credit Guarantee Corporation Act, 1961 by the Parliament.
    • It serves as a deposit insurance and credit guarantee for banks in India.
    • It is a fully owned subsidiary of and is governed by the RBI.
  • Coverage:
    • Banks, including regional rural banks, local area banks, foreign banks with branches in India, and cooperative banks, are mandated to take deposit insurance cover with the DICGC.
  • Types of Deposits Covered:
    • DICGC insures all bank deposits, such as saving, fixed, current, recurring, etc. except the following types of deposits:
      • Deposits of foreign Governments.
      • Deposits of Central/State Governments.
      • Inter-bank deposits.
      • Deposits of the State Land Development Banks with the State co-operative banks.
      • Any amount due on account of any deposit received outside India.
      • Any amount which has been specifically exempted by the corporation with the previous approval of the RBI.
  • Funds:
    • The Corporation maintains the following funds :
      • Deposit Insurance Fund
      • Credit Guarantee Fund
      • General Fund
    • The first two are funded respectively by the insurance premia and guarantee fees received and are utilised for settlement of the respective claims.
    • The General Fund is utilised for meeting the establishment and administrative expenses of the Corporation.
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