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The banking sector is among the most crucial in the economy. Financial transactions are the foundation upon which investors can build. Banks control the finance sector. Additionally, they bridge the gap between lenders and borrowers by providing quick solutions that offer both access and storage of liquid money. Apart from that, the banks also play a huge role in the development and implementation of the various monetary policies that govern the finance sector of a given country. Thus, any failures within the banking system can have detrimental effects on the economy as a whole. It is for this reason that the deposit insurance exists. It is an approach that aims towards keeping the banks in check to ensure that they are working within the stipulated guidelines and the acceptable frameworks (Demirgüç-Kunt, Kane and Laeven). Simply put, it is a safety net that ensures customers do not lose their deposits in case the bank is unable to pay its creditors. It is a financial security measure that protects the clients against economic instability. For this particular discourse, two case studies will form the subject of discussion. There will be comparisons based on the deposit insurance methods used in the United States and India retrospectively. Before talking about these two specific economies and their deposit insurance methods, it is worth noting that these plans differ because economies are different (Demirgüç-Kunt, Kane and Laeven, 85). Thus, for every country, various factors and dynamics come into play when deciding on the best deposit insurance methods. For an objective analysis of both countries, report for each will precede the comparison between the two systems.
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Deposit Insurance Method in India
India is among the most populous countries in Asia. It is hard to understate the importance of a smooth and robust banking system in such an economy. The Guide to Deposit Insurance and Credit Guarantee Corporation, DICGC, is the firm responsible for deposit insurance for all banks in India. These banks include all the commercial banks and the cooperative banks. The retail bank section covers all the foreign banks in India, local area banks, and regional rural banks all of which DICGC insures (Kawai and Prasad, 96). The cooperative banks section consists of all primary, central, and state banks that carry out their business in the Union Territories. However, the primary cooperative societies are not part of the insurance plan. In the event of bank failure, DICGC protects the bank deposits that are readily payable in India. These deposits include savings, current account balances, fixed savings, and the recurring deposits. The deposits made by foreign governments, as well as the state government deposits and the inter-bank deposits, are not part of the insurance plan. It is the same case for any amount that the Reserve Bank of India exempts from the insurance program. DICGC insures every depositor up to a maximum amount of about 1,000,000 Indian Rupees. Both the principal and accruing interest amount that the depositor holds are part of the maximum amount that can be insured.
The deposit insurance system in India is quite favorable to the customers since DICGC insures them once they open bank accounts with the banks above which are part of the insurance plan. It is not possible to obtain insurance for different amounts of money held which a single client deposits in separate bank accounts. In such a case, all the deposits are added up to enable for the calculation of the deposit insurance amount (Kawai and Prasad, 125). However, in case the client has deposited different amounts in various banks under the same name, then DICGC calculates the deposit insurance amount for each deposit separately. This helps to avoid the issue of inter-banks transfer which the deposit insurance package does not cover.
The most integral component of the deposit insurance system in India is the cost of the deposit insurance. The insured bank is responsible for paying this and thus, the clients have no liability whatsoever (Demirgüç-Kunt, Kane and Laeven, 104). Another critical aspect is the parameters that define when DICGC bears the obligation to pay the deposit insurance. Such cases include when the bank goes into liquidation which may occur as a result of various factors including, but not limited to unfavorable economic conditions. Also, if the client bank gets into a merger ship with another bank, DICGC should pay the clients the maximum possible deposit insurance amounts as per the clients’ savings amount. In the first scenario, DICGC should pay the clients through the liquidator within two months after receiving the claim list. The assumption here is that any bank that chooses the liquidity strategy should inform all the relevant stakeholders to settle any pending issues before liquidation or before getting into a merger ship.
Deposit Insurance Method in the USA
The Federal Deposit Insurance Corporation, FDIC, is responsible for deposit insurance in the United States. This organization is an independent government entity that functions in the capacity of the government under the Banking Act. The corporation is responsible for insuring bank deposits against any loss that may arise as a result of bank failure. The idea of having deposit insurance came up after the collapse of some American banks during the Great Depression (Greer and Gonzales 124). FDIC derives its income from assessments based on the insured banks. Assessment is carried out based on the average deposits. The deposit insurance started at a paltry $5,000, but currently, it stands at $250,000 per depositor for every bank.
An objective evaluation of the two deposit insurance methods highlights some clear distinctions. First of all, the United States government implemented the deposit insurance method long before India implemented theirs. Thus, when comparing the time it has taken for both programs to be successful, it is true to state that the United States has a more stabilized deposit insurance plan. In addition to that, the insured banks are responsible for the cost of the deposit insurance. However, in the United States, there is an exclusive cover for the deposit insurance. In other words, there is a special fund that protects the banks from the credit obligations brought about by the payments the banks make towards the deposit insurance fund. Thus, in addition to protecting the clients from total loss in case the bank liquidates, the bank is also protected from liquidation by the special funding (Greer and Gonzales 132). In India, banks assume all the responsibilities, and there is no safety net to guard against the threat of liquidation. The amount that is payable if any of the situations leading to the payment occurs is quite low in India compared to the amount owed in the United States. Finally, DICGC obtains funding from the banks which it insures while FDIC utilizes the money it receives after assessing the banks it protects. The evaluation takes into consideration the average of the total deposits within the bank under examination.
Given the apparent differences between the two systems, various reasons can be put forth to explain the phenomenon. In one of the most probable explanations, the large population in India contributes to the current deposit insurance plan. A vast community can be challenging to manage when it comes to the monetary issues. Thus, the question of population plays a massive role in the current setting. In addition to that, a proper financial plan should have a stable economy that supports economic development.
A comparison between the two economies shows evident disparities regarding the economic position of the two countries. The economy of United States is quite healthy and robust due to the high level of technology together with industrialization. The general implication here is that the people in the United States have a better average salary in comparison to their Indian counterparts. Again, the issue of population pops up. The United States has a modest population which implies that unemployment levels are low (Demirgüç-Kunt, Kane and Laeven 133). High unemployment levels in India indicate that the living standards are low due to low income or lack thereof. All these factors influence the current deposit insurance plan in India.
The current deposit insurance plan for India might work in the United States. However, for that to happen, several adjustments and provisions have to be made. Such include adjusting the premiums for the modest population. The payable amount has to be increased as well since it is $235,000 off the mark according to the current foreign exchange rates. Additionally, adjustments are necessary regarding the economic status of the United States which is much better in comparison with that of India.
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The only other significant difference that makes the Indian system suitable for India is the legal system. The legal system for the Indians is different to that of the Americans, and this can pose problems for the Americans if they decide to adopt the Indian policy. Besides that and the other factors above, there are no other significant differences between the two deposit insurance plans.
Conclusively, the financial system is the foundation of economic success. The policies and frameworks that govern this critical sector should be able to support all the areas of concern, of which the deposit insurance plan is a fundamental aspect. The deposit insurance plan should be able to help the financial sector thoroughly, especially the banks.
- Demirgüç-Kunt, Aslı, Edward James Kane and Luc Laeven. Deposit Insurance Around the World: Issues of Design and Implementation. MIT Press, 2008. Print.
- Greer, James L. and Oscar Gonzales. Community Economic Development in the United States: The CDFI Industry and America’s Distressed Communities. Springer, 2016. Print.
- Kawai, Masahiro and Eswar Prasad. New Paradigms for Financial Regulation: Emerging Market Perspectives. Brookings Institute Press, 2013. Print.