Hike insurance cover on deposit

IN PERSPECTIVE

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While assuring the depositors of the troubled Punjab and Maharashtra Cooperative Bank (PMC Bank), Finance Minister Nirmala Sitharaman said recently that the government may consider increasing the deposit insurance cover from the existing limit of Rs 1 lakh. The crisis at PMC Bank has revived the debate on the adequacy of insurance coverage of people’s bank deposits. Many are of the opinion that the government cannot let banks and NBFCs go belly-up routinely and ignore the interests of depositors.

In India, Deposit Insurance and Credit Guarantee Corporation (DICGC), which is a wholly-owned subsidiary of the RBI, has been providing deposit insurance since 1962. It has been “contributing to financial stability by securing public confidence in the banking system through the provision of deposit insurance, particularly for the benefit of small depositors.” A robust deposit insurance system helps instill confidence in the banking system and helps attract deposits.

Barring primary cooperative societies, all commercial banks, including the branches of foreign banks functioning in India, Local Area Banks, Regional Rural Banks, Co-operative Banks, Small Finance Banks and Payment Banks are covered under the Deposit Insurance Scheme. As on 31 March 2019, 2,098 banks were insured under the scheme. In terms of Section 11 of the DICGC Act, 1961, all new commercial banks have to register with DICGC soon after they are granted licence by the Reserve Bank. The corporation collects insurance premiums from the insured banks for the administration of the deposit insurance system. To get the cover, a bank has to pay the corporation a premium of 10 paise per Rs 100 or 0.001% of its assessable deposits. The premium paid is borne by the banks and not passed on to depositors. However, if the bank delays the payment of premium, it is liable to pay interest at the rate of 8% above the Bank Rate on the default amount.

Under the provisions of Section 16(1) of the DICGC Act, when a bank is liquidated, every depositor will get from the DICGC a maximum insurance amount of Rs 1 lakh on the deposits held by him in “the same capacity and in the same right” on the date of liquidation. That said, in FY2019, the DICGC took an average of 1,425 days to settle the first claims on a de-registered bank. The amount of Rs 1 lakh includes the combined amount of all the deposits kept in different branches of a bank. Also, it includes both the principal and interest accrued held across savings bank account, current account, fixed deposit and recurring deposit accounts of a depositor. So, if a depositor had Rs 90,000 in his savings account and Rs 2 lakh in his FD with the same bank, he will get a maximum amount of Rs 1 lakh and will lose the remaining Rs 1.9 lakh. However, if a depositor has Rs 1.25 lakh in his savings account and Rs 2 lakh in FD as the guardian of a minor, then he will get Rs 1 lakh from each of the said accounts as they are treated as different accounts.

Inadequate cover

The insurance cover was last increased to Rs 1 lakh in 1993 from Rs 30,000 earlier and has remained unchanged for the last 26 years! This limit is grossly low when compared with the cover available in developed as also many developing countries. An increase in this cover is long overdue. The moot point is, this limit should be Rs 5.44 lakh today, assuming an inflation rate of 7% from 1993.

What is alarming is that out of the assessable deposits of Rs 1.2 lakh crore, only Rs 33,700 crore – only 28% of deposits -- are insured. What is comforting is that RBI has not been allowing commercial banks to fail in the last few decades. It is mainly the cooperative banks that have been failing the depositors regularly.

The argument for not increasing the cover is that the insurance premium paid by banks is too low. However, a cursory look at the balance sheet of DICGC for the financial year ended 2019 reveals that DICGC settled claims amounting to only Rs 37 crore but received an insurance premium of Rs 12,040 crore during FY19. DICGC has so far settled claims of Rs 5,117 crore since inception, out of which the substantial portion of Rs 4,822 crore were claims relating to 351 cooperative banks that were liquidated.

Since the claims settled is a miniscule portion of the premium received, DICGC has been able to build a healthy Rs 93,750 crore in its Deposit Insurance Fund through the transfer of excess of income (premium) over expenditure (claims paid). There is also an inflow of small amounts out of the recoveries made from the liquidators/administrators/transferee banks. The corporation invests this amount in government securities and because of the cut in repo rate and the corresponding fall in yields of G-Secs should make windfall gains for FY2020. All this makes a strong case for a hike in the insurance cover on deposits.

(The writer, a former banker, teaches at the Manipal Academy of Banking, Bengaluru)

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