Even as Finance Minister Nirmala Sitharaman takes the first step towards soothing the frayed nerves of bank depositors by promising a hike in insurance limit from Rs 1 lakh, the Reserve Bank of India's subsidiary Deposit Insurance and Credit Guarantee Corporation (DICGC) has had a good logic behind keeping it low for the last 26 years.
DICGC is one of the 146 members of an international body called, International Association of Deposit Insurance (IADI), which sets the principles for deposit insurance. The IADI recommends a minimum deposit insurance coverage of 80 per cent of the total deposit accounts and 20-30 per cent in value terms in a member country.
As against this guiding principle, DICGC covers 92 per cent of the deposit accounts in India. The value of deposits covered at 28 per cent are also well within the IADI range of 20-30 per cent.
The reason for covering a low value as put forward by IADI is that while deposit coverage should be limited, credible and cover the large majority of depositors, it should leave a substantial amount of deposits exposed to the market discipline.
IADI also says that the level and scope of deposit coverage should be reviewed periodically, that is, at least every five years to ensure that it meets the public policy objectives of the deposit insurance system.
But, in India, the deposit insurance coverage was reviewed last time 26 years ago. The deposit insurance started with a limit of Rs 5,000 in 1968. This was revised upwards to Rs 10,000 after two years in 1970. The next revision happened in 1976 to Rs 20,000 after six years. In 1980, it was changed to Rs 30,000. The last revision happened in 1993 to Rs 1 lakh.
Post the debacle of Punjab and Maharashtra Co-operative Bank (PMC Bank), the government is considering introducing a legislation in the ongoing Winter Session of the Parliament to raise the existing deposit insurance limit.
Any increase in deposit insurance entails a cost. Banks currently pay a premium of Rs 100 for a deposit of Rs 1 lakh to the DICGC. Any hike in the deposit insurance may involve a cost that the bank may pass on to depositors by adjusting it in the interest rate that they offer.