If deposit insurance is hiked, the direct beneficiary is the customer
The deposit insurance cover offered by the Deposit Insurance and Credit Guarantee Corporation (DICGC) may be gradually hiked to Rs 3 lakh from Rs 1 lakh. Sources have told Moneycontrol that the proposal is currently under discussion at the finance ministry.
“The hike will not be immediate but will happen after taking a consensus from all the stakeholders involved,” said an official.
The person quoted above have clarified that this is the initial discussion stage, and it will be hiked only after getting the views of banks, DICGC and the Reserve Bank of India (RBI).
The deposit insurance cover was last hiked in May 1993 to Rs 1 lakh from Rs 30,000 in July 1980. At the end of FY19, the number of registered insured banks stood at 2,098, comprising 157 commercial banks and 1,941 cooperative banks.
DICGC which is the wholly-owned subsidiary of the RBI, provides this insurance cover for deposits. Banks are required to pay premium to DICGC. In FY19, DICGC collected Rs 12,043 crore as premium and settled Rs 37 crore worth claims.
A State Bank of India (SBI) research report says that the recent Punjab and Maharashtra Co-operative (PMC) Bank crisis has again raised the question of deposit insurance in India. It says that, since 1993, there has been a paradigm shift in the profile of customers and the conduct of business by banks.
Soumya Kanti Ghosh, Group Chief Economic Adviser – State Bank of India, says in the report that, over the years, the level of insured deposits as a percentage of assessable deposits has declined from a high of 75 percent in FY82 to 28 percent in FY18. Given this backdrop, he says that there is a dire need to revisit the insurance coverage of the bank deposits.
The RBI, which is the parent institution of DICGC, did not respond to a query sent by Moneycontrol.
History of deposit insurance
The concept of insuring deposits kept with banks received attention for the first time in 1948 after the banking crisis in Bengal. The issue came up for reconsideration in the year 1949 but was held in abeyance till the RBI set up adequate arrangements for inspection of banks.
A serious thought to insuring deposits was, however, given by RBI and the central government after the failure of the Palai Central Bank and the Laxmi Bank in 1960. The Deposit Insurance Act, 1961 came into force on January 1, 1962. Deposit Insurance Scheme was initially extended to all functioning commercial banks
This included SBI and its subsidiaries, other commercial banks and the branches of the foreign banks operating in India. Later, cooperative banks were also included in this list.
However, expert committees formed later called for an increase in the level of deposit insurance. For instance, the M Damodaran-led Committee on Customer Services in Banks set up by the RBI recommended in 2011 that the deposit insurance be increased to Rs 5 lakh, which was set up by the RBI, recommended in its report in 2011 a five-time increase in the cap to Rs 5 lakh.
Why increase now?
The finance ministry has been discussing the proposal to increase deposit insurance for the past several quarters. However, the PMC Bank crisis led to a heightened demand for the limits to be increased.
The RBI capped withdrawals from the PMC Bank beginning in September, placing certain operational restrictions on it. The withdrawal was capped at Rs 1,000 in the beginning. This went up to Rs 10,000, Rs 25,000 and finally was increased to Rs 40,000 on October 14. PMC Bank came under fire for fraud and misreporting of bad loans.
The lender was also found to have violated the RBI’s group exposure norms. Its exposure to the realty firm Housing Development & Infrastructure (HDIL) is being investigated by the authorities including the Economic Offences Wing (EOW).
Who benefits if deposit insurance is increased?
If deposit insurance is hiked, the direct beneficiary is the customer. In the rare event of a bank failure when the deposit amount is forfeited, an account holder will be guaranteed upto the Rs 3 lakh limit if it is finalised.However, this will mean that the premium paid by the banks for the insurance cover will also go up. Currently, DICGC charges upto 10 paise for every Rs 100 on an annual basis.