The deposit insurance cover offered by the Deposit Insurance and Credit Guarantee Corporation of India (DICGC), a subsidiary of Reserve Bank of India (RBI), for term depositors of banks should be doubled from the existing Rs 1 lakh to Rs 2 lakh. There should also be a separate provision for senior citizens and retired people because these people have no social security in place and mostly keep fixed deposits for earning interest income which in many cases becomes a part of their current income for regular upkeep.
These suggestions are part of a research note prepared by a State Bank of India team. The objective was to provide comfort to depositors that their deposits up to a certain limit are safe in case of a bank going bust.
When Business Today asked RBI for a case for higher deposit insurance limit, Deputy Governor N S Vishwanathan responded explaining that there has been this demand in the past as well, but (to decide) the extent of deposit insurance cover, there are many elements on what much percentage of deposits should be covered, what per cent of depositors should be covered. "So, there are many factors that will determine that (cover) so there have been studies based on that and of course, still no final decision has been taken," said Vishwanathan.
Section 16(1) of the DICGC Act empowers the corporation to raise the limit with approval of the central government. But it is not known whether DICGC, an RBI subsidiary, had ever recommended the government for a higher limit. Given the last change took place way back in the 1990s there is a strong case for increasing the limit. The issue for higher limit hit centrestage post the debacle of Punjab and Maharashtra Cooperative Bank (PMC Bank).
SBI research points out that data on cross country deposit insurance cover limit shows that deposit coverage in India is among the lowest in terms of per capita income. At Rs 1 lakh, which is USD $1,508, the deposit insurance coverage is 0.9 times of India's per capita.
The average balance of savings account is Rs 23,590 per depositor where SBI research has suggested keeping the limit at Rs 1 lakh. The average balance of term deposit is Rs 2,75,908 per depositor where the insurance limit can be hiked to Rs 2 lakh.
There is a strong case for a higher limit as the last change took place 26 years ago from Rs 30,000 to Rs 1 lakh. Today, it is very common to have a deposit of more than a lakh in a bank account. In fact, the last four changes till 1993 took place in quick succession reflecting the depreciating value of money in an economy because of inflation. Deposit insurance cover was just Rs 5,000 in 1968. This was revised to Rs 10,000 in 1970; in 1976, the limit was enhanced to Rs 20,000 and then in 1980 to Rs 30,000 per depositor.
There is an insurance model to take care of the loss. Banks generally don't fail. In the insurance model, banks actually pay a marginal premium of Rs 100 for a deposit of Rs 1 lakh to the DICGC. The insurance model makes it easier for the corporation to underwrite the risk. In fact, there are not many cases of banks going bust in India. There will be few surely in future, but insurance model takes care of the risk.
With cooperative banks failing and private sector banks facing asset quality deterioration, negative sentiments could build in parking money in some class of banks, say, old private sector banks or cooperative banks. RBI is promoting new banking models of which payments bank and small finance banks are already operational. Similarly, RBI recently allowed new banks like Bandhan Bank, which focuses on underserved and unbanked population. These full scale banks with a niche business focus also brings a risk element as such models are not tested under a banking platform. Depositors are also thronging these banks as some are offering higher interest rates. The changed banking environment makes the case stronger for higher deposit insurance.
Deposit growth rate is already falling. Bank deposits used to grow at over 25 per cent some two decades ago. This has now fallen to 10-15 per cent in the last decade. In an economy where banks are the major source for funding corporate and infra sector, government should try to bring back confidence of depositors.