Hike insurance cover on deposits

The government in mid-July reportedly decided to drop the controversial Financial Resolution and Deposit Insurance (FRDI) Bill, which it had introduced in the Lok Sabha in August 2017. Bank customers need not worry on a bail-in provision and the present provisions of insurance of bank deposits is likely to continue. It is time, however, to re-look at prevailing provisions on insurance of bank deposits from the point of banks and their customers.

Deposit Insurance and Credit Guarantee Corporation (DICGC) commenced its operations in 1962 under the RBI. DICGC provides insurance cover for deposits in all commercial banks, foreign banks functioning in India, local area banks, regional rural banks and cooperative banks. Membership in deposit insurance is compulsory for all banks and the number of such banks is 2,125, as of March 2017. However, primary cooperative societies are not covered.

Each depositor in a bank is insured up to Rs 1 lakh (both principal and interest) as on the date of liquidation/ cancellation of the bank’s licence or the date on which the scheme of amalgamation/merger/reconstruction comes into force.

The eligible amount is distributed to the depositors through the liquidator and, in case of amalgamation/ merger, the amount is paid to the transferee bank. Banks have the right to set off their dues from the deposit amount and insurance is available on the net balance only. The amount received subsequently by the liquidators in respect of settled accounts is to be repaid to DICGC.

As per the Annual Report of DICGC (March 2017), the total insured accounts were 189 crore and 92% were fully protected — implying that 92% of the depositors do not have more than Rs 1 lakh in a bank.

The assessable deposit amount was Rs 104 lakh crore and of it only 29.5% was insured — as against 59% a decade ago in 2006-07. The share in the amount of insured deposits has been falling from the peak of 75% in 1997-98.

Several developing/developed countries provide much higher limits in deposit insurance. As per Annual Survey 2017 (figures as on December 2016) of the International Association of Deposit Insurers (IADI), the coverage per depositor per institution (in $) was: India – 1,543; Argentina – 28,500; Brazil – 76,722; Indonesia – 1,47,275; Korea – 41,374; Malaysia – 55,729; Nepal – 1,836; Sri Lanka – 2003; US – 250,000, etc. There are very few countries below the level prevailing in India. The level of insurance cover provided in India is dismally low compared to other countries. It must be admitted that the banking structure/regulations in India are quite sound, compared to several other countries.

Further, the last revision of deposit insurance limit to Rs 1 lakh was 25 years ago (1993), from the earlier limit of Rs 30,000 (1980). Factoring earlier Cost Index Inflation, the value of Rs 1 lakh in 1993 comes to Rs 5.04 lakh in 2016-17. Considering the erosion in the value of the rupee and global practices, it is high time that deposit insurance cover is raised to at least Rs 5 lakh.

Member banks are required to pay the premium for insuring customer deposits on a half-yearly basis. The yearly premium rate of 5 paisa for Rs 100 in 1993, was increased to 8 paisa in 2004 and from 2005 onwards, the rate continues to be at 10 paisa. A huge amount, to the tune of Rs 70,150 crore (2016-17), is accumulated in the Deposit Insurance Fund, constituted out of the premium from the banks and coupon income from government securities.

The premium is paid on the aggregate amount of deposits (excluding ineligible deposits like government, inter-bank deposits, etc) even though the insurance cover is capped at Rs 1 lakh.

About 93% of the premium received during 2016-17 (of Rs 10,100 crore) was from commercial banks and only 7% was from co-operative banks.

However, the share of co-operative banks in the total amount of claims settled since inception in 336 banks is 94%, involving Rs 4,739 crore (total settled – Rs 5,035 crore). Some amount from the claim settlements has been recovered subsequently. There were no claims from commercial bank customers during the past 15 years while claims from co-operative banks still continue. During 2016-17, claim settlement was of Rs 56.5 crore in nine co-operative banks.

Therefore, it is imperative to put in place differential premiums for insuring bank deposits or to switch to risk-based premium, instead of charging a flat rate for all banks. This will, to some extent, ensure better risk management by individual banks. Eventually, at the macro level, the premium for co-operative banks may go up, with a consequential reduction in that for commercial banks. Cross-subsidisation, practiced for decades, should end. Further, premium can be only on the deposits insured, that is, up to Rs 1 lakh, instead of on the aggregate amount.

The banking industry is growing and the value of the rupee is falling continuously. It is imperative to enhance the limit on deposit insurance considerably and also to put in place differential premiums payable by banks for insuring deposits. These modifications will help to enhance public confidence in the banking system and will add to financial stability.

(The writer teaches banking at ICICI Manipal Academy, Bengaluru)