Mint Road not in favour of risk cover for NBFC deposits

Insurance coverage for deposits in non-banking finance companies (NBFCs) is unlikely to be provided as the Reserve Bank of India (RBI) has expressed its reservations.

An internal working group, headed by N Sadasivan, RBI executive director, and another one headed by R Beri, chairman and managing director of New India Assurance, recommended against providing insurance cover to deposits of NBFCs, the Centre said in its action taken report on the suggestions of Joint Parliamentary Committee that probed the stock scam of 2001.

After analysing various parameters including the risk profile of NBFCs, level of regulatory compliance, problem of moral hazards and market discipline, the first group headed by Sadasivan had recommended that there was no need to provide insurance cover to NBFC deposits.

The second working group, with external members and set up to examine the recommendation of the first committee, had agreed with the Sadasivan group's observation.

"The report of Sadasivan group, which is well-documented, has taken all the relevant issues into due consideration before arriving at the conclusion and its recommendations are acceptable," the action taken report said, adding, "the RBI is in agreement with recommendations of the Beri working group."

However, the Beri group stressed advertisements, prospectus and deposit application forms relating to deposits in NBFCs should "clearly" spell out that deposits are not insured so that the depositors are aware of the absence of insurance cover and take an informed decision on this basis.

Observing that at present, DICGC insurance coverage was available to depositors in co-operative banks, the Joint Parliamentary Committee had suggested the Centre should explore the feasibility of extending a similar scheme to depositors in NBFCs.

Government had, its earlier action taken report, said it was mulling introduction of a new bill on bank deposit insurance as part of measures to raise insurance coverage to Rs two lakh from the present Rs one lakh.

The Mumbai-based Investors Grievances Forum had said insurance coverage could be provided for the deposits in NBFCs either through DICGC or insurance companies, or by establishing a separate insurance corpus fund financed by NBFCs/ government/ RBI.