k c chakrabarty : empowering deposit insurance entities to face challenges posed by an emerging financial landscape – global and indian experience valedictory address by dr k c chakrabarty, deputy governor of the reserve bank of india, at the international conference on “ role of deposit insurance in bank resolution framework – lessons from the financial crisis ”, jodhpur, 15 november 2011. * * * assistance provided by dr a raravikar in preparation of this address is gratefully acknowledged. 1. mr. hiroyuki obata, deputy governor, dicj, japan, mr. carlos isoard, secretary general, iadi, switzerland, mr. jerzy pruski, president, bgf, poland, mr. fred s. carns, director, fdic, usa, mr. g. gopalakrishna, executive director, rbi, distinguished delegates, ladies and gentlemen. at the outset, on behalf of rbi, i extend a hearty welcome to all of you to india and especially to this fascinating state of rajasthan. we thank iadi for agreeing to hold this conference jointly with dicgc. as you are aware, dicgc entered its golden jubilee year on january 1, 2011. this event is being hosted as a part of the golden jubilee celebrations of dicgc and, hence, holds a special significance for us. global financial crisis and deposit insurance 2. recent global financial crisis has revealed that financial systems around the world rely on safety nets to reduce the adverse impact of financial crisis as also to prevent the re - occurrence of the crisis. during the global crisis, uncertainty triggered panic reactions and collapse of banks. under these circumstances, deposit insurance emerged as an important part of financial safety net in arresting panic reaction. governments across the globe took measures such as raising the deposit insurance coverage limits, providing blanket guarantees, etc. these measures restored the public confidence in banking systems. thus, the importance of deposit insurance as a tool for preventing and mitigating the impact of financial crises as also for the smooth running of financial systems and maintaining financial stability has been fully appreciated. 3. the global financial crisis, thus, evoked rethinking on the role of deposit insurance systems and broader safety net issues. it is now widely felt that the important safety nets such as deposit insurance systems should play a more pro - active role in regulatory frameworks for early identification of bank failures and their effective resolution. in order to enable the deposit insurance systems to play

) and an effective interface between the dicgc and banks ’ core banking solutions ( cbs ) to access depositor databases. moreover, deposit insurers should be informed sufficiently in advance of the conditions under which a reimbursement may be required and be provided with access to depositor information in advance. fourth, it is necessary to increase the coverage limit that has remained unchanged at inr 0. 1 million since 1993. the increase in deposit insurance coverage has also been alluded to in the recent damodaran committee report on customer service. fourth, due to the dual nature of control over co - operative banks and low level of technology deployed in these banks, there are delays in receiving information regarding depositors. also, there are delays in appointment of liquidators. dicgc, currently, has little powers over liquidators to expedite the collection of information. the process can be expedited if liquidators provide the information within a shorter time - frame. therefore, it will be beneficial to grant dicgc the power to appoint and monitor liquidators. fifth, for maintaining depositor confidence, the deposit insurer should have sufficient funds available to fulfill its mandate. the financial position of dicgc needs to be strengthened with appropriate arrangements for back - up funding. about half of the premium income of dicgc, which is its main source of funds, is paid as income tax to government. since dicgc is a non - profit organisation serving social obligations of protection of small depositors, it should be exempted from payment of tax, as is done globally. the tax exemption would enable dicgc to build up its fund base and thereby provide higher coverage to depositors and even pass on the benefits to insured banks by reducing the rate of premium, after the desired reserve ratio is attained. sixth, global crisis has shown that deposit insurer does need assistance from government / central bank in case of any systemic crisis and the required amount is unpredictable. the back - up funding to dicgc from rbi is a small amount ( inr 50 million ). therefore, it would be ideal if bis central bankers ’ speeches availability of back - up support can be made unlimited and with a quick approval process. seventh, dicgc has been having a flat rate premium system. this could be replaced by a risk - based differential premium system. the latter would reduce moral hazard and bring greater fairness in the premium assessment process. 14. for redesigning india ’ s