Banking & Monetary Policy

Insurance of bank balance means the deposits kept in the bank is insured to save the depositors’ money in case the bank goes bankrupt. In India, this is done through the ‘Deposit Insurance and Credit Guarantee Corporation (DICGC)’ it insures deposits up to the certain limit that is now ₹ 500000 per depositor per bank.

Merits:
1. Deposit Safety: It offers safety for the depositors, especially the one who deposits a small amount of money in their account in case the bank goes under.
2. Confidence in banking: Deposit insurance instills more confidence within people, especially in depositing their money in the banking institutions.
3. Financial Security: This safe depositor ensures that there are no bank runs and is always supportive of the system in place within the banking industry.

Demerits:
1. Moral Hazard: It can be said that deposit insurance does affect the risk-taking behavior of the banking institutions to the extent that they can rely on insurance to face loss.
2. Insurance protecting one’s money in the bank is not always great for big corporations or individuals carrying large sums of money. Meaning, when something wrong occurs, they may not be able to recover their entire amount.
3. When the cost of insurance rises, banks can charge a higher price for the money they lend to you. You then get a smaller amount in interest when you borrow money or when you put your money in the bank because the bank is trying to cover up the increased cost.

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In addition, to bolster the strength of bank balance insurance, the coverage could be broadened in tandem with the stringent risk criteria so as not to succumb to moral hazard. Other benefits that are related and pertinent to this include improved depositors’ literacy regarding finances because they now learn about coverage limits and therefore can make informed banking choices; hence, promoting financial stability.

Key laws governing Indian banking:

1. Reserve Bank of India Act, 1934:

Allows RBI to set up RBI control over the direction of a monetary policy, exercises powers to supervising the direction of banks and keep aproper check on monetary operation hence making it a central authority.

2. Banking Regulation Act 1949:

It provides direction on issues to do with licensing of banks, capital, structure and management and operations, including aspects on mergers and acquisitions.

3. Prevention of Money Laundering Act, 2002:

The Act strictly compels banks to adhere to AML and KYC standards besides closely observing transactions which they find suspicious;vi and reporting such transactions to the Financial Intelligence Unit-India (FIU-IND).

4. Basel III Norms:

The implementation of international standards is achieved when RBI asks the banks to maintain specific capital and liquidity ratio that would eventually minimize the probability of the spread of systemic risk and boost resilience.

5. Insolvency and Bankruptcy Code (IBC), 2016:

There has been also clear working out of mechanism for recovery of credits which also help in default resolution of banks and has also ensured strict compliance of credit discipline of the borrowers.

6. Negotiable Instruments Act, 1881:

Deals with safe, transparent and courteous way at the back office management of financial instruments such as cheque, bearer cheque, bill and bearer bill and helps to ensure integrity of electronic transactions.