Insurance on deposits and prompt delivery of TDS certificates are two issues the committee has overlooked

Moneylife Digital Team

Several cooperative banks are saddled with bad debt. These banks usually have a lot of political influence. Poor supervision and low accountability has led to a series of failures among cooperative banks and has caused huge losses to depositors.

Given the current state of some of these banks, more bank failures can be expected. As per the current law, bank deposits up to Rs1 lakh per depositor are insured. The job of insuring and paying out is entrusted to the Deposit Insurance and Credit Guarantee Corporation (DICGC), an entity fully-owned and regulated by the Reserve Bank of India (RBI). We dug into the data available to check the payouts DICGC has made of late on account of bank failures. It appears that DIGCC paid out a whopping Rs1,025 crore in the past three years, from April 2008 to March 2011, to bank depositors in 83 banks. And all of these 83 banks were cooperative banks.

Now, unmindful of this, the Damodaran committee set up by RBI to improve customer services, has recommended that the limit for deposits eligible for insurance should be raised to Rs5 lakh from Rs1 lakh. What purpose would it serve, since nationalised banks never fail and even private banks are subjected to a shotgun wedding to a nationalised bank (Oriental Bank of Commerce was forced to take over Global Trust Bank)? It would only reward the depositors of terribly run banks (read, cooperative banks), unabated bank failures and higher cost of bank insurance.

The DICGC collects a premium from 2,249 banks, of which a whopping 2,080 are cooperative banks. The premium charged is up to a maximum of Rs0.15 per Rs100 of insured deposits. Surprisingly, cooperative banks do not contribute the maximum to the premium corpus. In fact, they account for just 7.5%; less than 100 commercial banks account for 88% of the insurance premium collected.
 
TDS Problem
The Damodaran committee has overlooked another issue as well. The interest on bank deposits is subject to income-tax which is deducted at source (TDS) by banks. One of Moneylife’s columnists says, “depositors who honestly pay taxes on the interest received from banks on their deposits, have been suffering in silence for the past several years, because, day by day, they find it difficult to get TDS certificates from these banks, who simply do not bother to give the certificates on time. In the month of July that has just gone by, people have been running from pillar to post to get TDS certificates from their banks, to enable them to file their returns on time.”

If you happen to withdraw the deposit before maturity to meet any emergency, the bank will recover from you some part of the interest already paid to you as penalty for premature withdrawal, but will not refund any part of the tax already deducted from your account. This is putting unnecessary additional burden on savers. Will these lacunae be corrected in the future?