Memo To Finance Minister: Repaying Unclaimed FDs, Dividends, Etc, Needs More Than Just A Drive By Regulators

Finance Minister Nirmala Sitharaman flagged a serious concern at yesterday’s (8 May) meeting of the Financial Stability and Development Council (FSDC): the mounting levels of unclaimed bank deposits, company and mutual fund dividends, and insurance payouts, among other things. 

“Regulators should conduct a special drive to facilitate the settlement of unclaimed deposits and claims in the financial sector across all segments, such as banking deposits, shares and dividends, mutual funds, insurance, etc,” Sitharaman said.

These sums are not small. I would estimate the total amount of unclaimed sums belonging to investors, depositors and policyholders to be upwards of Rs 1,00,000 crore.

Of these, bank deposits alone account for Rs 35,012 crore, according to a figure mentioned by the government in Parliament earlier this year.

In 2021, the total amount of unclaimed amounts was put at over Rs 82,000 crore, comprising Rs 26,497 crore in provident fund accounts, Rs 18,381 crore in inactive bank accounts (excluding Rs 4,820 crore in matured fixed deposits), Rs 17,880 crore in mutual funds, Rs 15,167 crore in life insurance policies, and Rs 4,100 crore in dividends.

So, it is not unreasonable to assume that the amounts now exceed Rs 1 lakh crore.

However, the Finance Minister would do well to look deeper and go beyond just asking our financial institutions and regulators to do special drives to give the money back to whom it belongs, whether it is the original owners or their inheritors.

There are three levels at which the problem needs to be tackled, of which the most important one is unifying inheritance laws and making the claims process simpler.

The other two are a drive to acquaint all bankers, fund officials and insurance personnel with what they need to do when there is an unclaimed deposit of dividend, depending on the circumstances, and the third is to provide protection to officials who stick their necks out to pay out these unclaimed sums.

Let’s deal with the last two first: 

Many deposits, dividends, provident funds and insurance policies lie unclaimed for three major reasons:

One is that the owners have moved and the banks or funds do not know where the notices informing owners about claims have to be sent;

Secondly, people often do not leave proper information for their inheritors on their assets and, additionally, the assets may be contested;

And third, the law is sometimes unclear or contradictory on who can claim the amounts, especially when the original owner dies intestate, or has failed to nominate a trustee, or when the nominees and/or ultimate inheritors are different persons.

Bankers are often unwilling to make extra efforts to pay out their outstanding deposits to survivors since they are afraid of legal consequences in case there is a contested claim later.

In the case of “either or survivor” accounts, the survivor is clearly the owner of the account when the other joint holder passes.

But when it comes to unmatured fixed deposits, it is far from clear that the survivor will be able to prematurely close the deposit and use it for her purposes, or even convert the account now rendered single by adding another joint holder (a daughter or son) to it for convenience.

It also suits banks to retain fixed deposits as they are, as they benefit from it.

There is also a tax angle to inherited amounts. While amounts secured through inheritance attract no tax, the inheritors have to file returns on behalf of the person whose assets are passed on to them.

The income tax portal mentions the following documents to be submitted by legal heirs while filing returns on behalf of the dead.

“Copy of legal heir proof from the below list:

• Legal heir certificate issued by a court of law/local revenue authority.

This brings us to the core of the issue: our laws on inheritance.

Complying with all the rules of inheritance and obtaining a court order in one’s favour on bank deposits, mutual fund units, and properties can take a year or more. How long it actually takes to get this done can extend even further if there is no will, or if a will is contested.

The problem of unclaimed deposits thus has three levels of remedies: one is education of citizens on their rights and bankers and financial sector officials on what they can do to legally speed up the payout of unclaimed amounts; second there is the question of ironing out the obvious misalignments in various laws (rights of nominees versus heirs, rights of joint holders versus joint owners, etc).

It may take a year or more to draft simpler laws and harmonise them across states, but it is worth a try.

It could be one of Nirmala Sitharaman’s best bequests to the Indian economy: a clear and unambiguous law on inheritance.

Of course, she cannot do this alone; the Law Ministry, states and regulators must be part of the consensus. But it is time to start the process now.

A good place to start would be a Centre-state committee of officials to look at all laws, rules and regulations and come up with a unified set of suggestions for legislation.

The Centre can do what it can; the states can be given a draft framework for aligning their laws with those of the Centre.