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The Corporate Logo of the Deposit Insurance
Corporation as it appeared on the first Annual Report.
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| The PDF file of the first annual report |
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(3.8 MB) |
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Deposit insurance, as we know it today, was introduced
in India in 1962. India was the second country in the world to introduce
such a scheme - the first being the United States in 1933. Banking crises
and bank failures in the 19th as well as the early 20th Century (1913-14)
had, from time to time, underscored the need for depositor protection in
India. After the setting up of the Reserve Bank of India, the issue came
to the fore in 1938 when the Travancore National and Quilon Bank, the
largest bank in the Travancore region, failed. As a result, interim
measures relating to banking legislation and reform were instituted in the
early 1940s. The banking crisis in Bengal between 1946 and 1948, once
again revived the issue of deposit insurance. It was, however, felt that
the measures be held in abeyance till the Banking Companies Act, 1949 came
into force and comprehensive arrangements were made for the supervision
and inspection of banks by the Reserve Bank.
It was in 1960 that the failure of Laxmi Bank and the
subsequent failure of the Palai Central Bank catalyzed the introduction of
deposit insurance in India. The Deposit Insurance Corporation (DIC) Bill
was introduced in the Parliament on August 21, 1961 and received the
assent of the President on December 7, 1961. The Deposit Insurance
Corporation commenced functioning on January 1, 1962 .
The Deposit Insurance Scheme was initially extended to
functioning commercial banks. Deposit insurance was seen as a measure of
protection to depositors, particularly small depositors, from the risk of
loss of their savings arising from bank failures. The purpose was to avoid
panic and to promote greater stability and growth of the banking system
what in today’s argot are termed financial stability concerns. In the
1960s, it was also felt that an additional the purpose of the scheme was
to increase the confidence of the depositors in the banking system and
facilitate the mobilisation of deposits to catalyst growth and
development.
When the DIC commenced operations in the early 1960s,
287 banks registered with it as insured banks. By the end of 1967, this
number was reduced to 100, largely as a result of the Reserve Bank of
India’s policy of the reconstruction and amalgamation of small and
financially weak banks so as to make the banking sector more viable. In
1968, the Deposit Insurance Corporation Act was amended to extend deposit
insurance to 'eligible co-operative banks'. The process of extention to
cooperative banks, however took a while it was necessary for state
governments to amend their cooperative laws. The amended laws would enable
the Reserve Bank to order the Registrar of Co-operative Societies of a
State to wind up a co-operative bank or to supersede its Committee of
Management and to require the Registrar not to take any action for winding
up, amalgamation or reconstruction of a co-operative bank without prior
sanction in writing from the Reserve Bank of India. Enfolding the
cooperative banks had implications for the DIC - in 1968 there were over
1000 cooperative banks as against the 83 commercial banks that were in its
fold. As a result, the DIC had to expand its operations very considerably.
The 1960s and 1970s were a period of institution
building. 1971 witnessed the establishment of another institution, the
Credit Guarantee Corporation of India Ltd. (CGCI). While Deposit Insurance
had been introduced in India out of concerns to protect depositors, ensure
financial stability, instill confidence in the banking system and help
mobilise deposits, the establishment of the Credit Guarantee Corporation
was essentially in the realm of affirmative action to ensure that the
credit needs of the hitherto neglected sectors and weaker sections were
met. The essential concern was to persuade banks to make available credit
to not so creditworthy clients.
In 1978, the DIC and the CGCI were merged to form the
Deposit Insurance and Credit Guarantee Corporation (DICGC). Consequently,
the title of Deposit Insurance Act, 1961 was changed to the Deposit
Insurance and Credit Guarantee Corporation Act, 1961. The merger was with
a view to integrating the functions of deposit insurance and credit
guarantee prompted in no small measure by the financial needs of the
erstwhile CGCI.
After the merger, the focus of the DICGC had shifted
onto credit guarantees. This owed in part to the fact that most large
banks were nationalised. With the financial sector reforms undertaken in
the 1990s, credit guarantees have been gradually phased out and the focus
of the Corporation is veering back to its core function of Deposit
Insurance with the objective of averting panics, reducing systemic risk,
and ensuring financial stability.
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