Insurance coverage

DICGC rejects banks’ request to exempt certificates of deposit from insurance coverage

The Deposit Insurance and Credit Guarantee Corporation (DICGC) has rejected a request by banks to exempt certificates of deposit (CDs) from deposit insurance coverage.

Bankers pointed out that CDs, which have a maximum term of one year, are issued in minimum denomination of ₹5 lakh and in multiples of ₹5 lakh thereafter, usually to institutional investors, but the insurance cover -DICGC deposits is only available for deposits up to ₹5 lakh.

Currently, banks pay an insurance premium of 12 paise per ₹100 of deposit including CD collected.

The banks’ request to exempt CDs from DICGC coverage comes even as they have increased funds recovered via CDs since June 2022 due to lack of liquidity in the market. Payment of the deposit insurance premium results in an outflow of funds.

Outstanding CDs from banks (net of redemptions) increased by ₹62,171 crore from ₹1,89,977 crore on 03 June 2022 to ₹2,52,148 crore on 23 September 2022, with the interest rate rising from 4 .89-5.89% to 5.81-6.73% during said period.

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The DICGC has told banks that bank-issued CDs should be counted towards payment of the deposit insurance premium, a senior banker said. In addition, the DICGC law does not allow differentiation between the different categories of depositors – institutional and non-institutional.

“DICGC coverage is only available for deposits up to ₹5 lakh. But CDs are issued by banks in lots of ₹25 crore / ₹50 crore / ₹100 crore etc. So, a single entity will hold ₹10-25 crore. So the size of the batch also matters.

“For example, a bank today issues ₹100,000,000 worth of CDs. The initial investor is, say, Kotak Mutual Fund (MF). They will hold the CDs for a few days and sell them, say, to Axis MF. This MF, in turn, can sell it, for example, to SBI and SBI MF,” said a senior banker.

As a result, the original owner of the CDs will not be known unless the information is extracted from the beneficiary position statement available from the custodian, he added.

“CDs are declared transactions. So there is a bit of transparency and you will know how fast the issuer is raising funds. However, in the case of group deposits, a bank can offer up to 8% interest rate, no one will know. Bulk deposits are not flagged,” said RK Gurumurthy, Head of Treasury, Dhanlaxmi Bank.