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Next time a bank fails or withdrawals are barred, depositors will get as much as 5 lakh as insurance payment within 90 days. Finance minister Nirmala Sitharaman said the Deposit Insurance and Credit Guarantee Corp. (DICGC) Bill, 2021, to facilitate this will be presented in the Parliament’s ongoing monsoon session.

Briefing reporters about the decisions of the Union cabinet on Wednesday, Sitharaman said the government has decided to recast the Limited Liability Partnership (LLP) Act to reduce penalty provisions and decriminalize some provisions for ease of doing business. LLP is a preferred legal form among startups. There are over 200,000 LLPs in India.

The insurance cover on bank deposits was raised from 1 lakh to 5 lakh last year, and Sitharaman had in her FY22 budget speech this year assured that the DICGC Act will be streamlined so that depositors are able to access their insured amounts in an easy and time-bound manner.

These payments could take 8-10 years after the bank’s liquidation, the minister said.

“Now we are saying that even if there is a moratorium on a bank, which means everything is frozen and depositors are not able to take money out of their account, even at that time, this measure (90-day access to insured amount) will set in," the minister said. Insurance payment will not have to wait till the eventual resolution or liquidation of the bank, Sitharaman said.

The minister explained that DICGC insures all bank deposits, including savings, fixed, current and recurring deposits and covers all commercial banks, whether public or private. Local area banks, regional rural banks, cooperative and small finance banks and local branches of foreign banks are also insured.

The move is significant given that several banks, including Punjab and Maharashtra Co-operative (PMC) Bank, Yes Bank and Lakshmi Vilas Bank, have faced stress in the recent past. Once the law comes into force, banks under moratorium, if any, will also benefit. However, the amendment won’t be applied retrospectively.

Sitharaman said that the distressed bank will list the claims and pass them on to the insurer within 45 days, and the payment process will be completed within 90 days, without waiting for the eventual liquidation or resolution of the bank.

Sitharaman explained that with the increase in the insurance cover to 5 lakh, 98.3% of all deposit accounts are insured and, in terms of deposit value, 50.9% of deposits are covered. Globally, deposit insurance covers only 80% of all deposits and covers only 20-30% of the deposit value, the minister added.

The government will move another bill to amend the LLP Act to decriminalize certain defaults in order to improve the ease of doing business.

Penal provisions in LLP Act will be reduced from 24 to 22, and 12 provisions will be decriminalized. The lapses getting decriminalized are technical or procedural in nature, and since no criminal intent is involved, these need not go to company law tribunals for adjudication. The minister explained that provisions in the Companies Act were decriminalized already, and a similar exercise in the LLP Act will ensure a level-playing field for businesses opting for these legal forms.

The government will also come out with a definition of ‘small LLPs’, which would be subject to fewer compliances, fees and penalties to reduce the costs of compliance. The cabinet approval is to define LLPs with 5 crore partner contribution and 50 crore sales to be treated as small LLPs. In January, an expert panel made this recommendation with a lower threshold.

The cabinet also cleared a deal between the International Financial Services Centre (IFSC) and global bodies of securities and insurance regulators, which is expected to improve ease of doing business for entities in the IFSC.

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