Even as less than a third of the bank deposits in value terms are covered by insurance, the government has turned down suggestions of raising the insurance cap on deposits from Rs 1 lakh to Rs 15 lakh.
The coverage under the Deposit Insurance and Credit Guarantee Corporation (DICGC) was last revised in 1993 from Rs 30,000 to Rs 1 lakh per depositor per bank. Deposit insurance by DICGC covers all commercial banks, local area banks, regional rural banks and co-operative banks and branches of foreign banks in India. In case of a bank failure, the Corporation pays maximum of Rs 1 lakh as the insured amount per depositor per bank. Primary cooperative societies, non banking financial companies and mutual funds are not insured by the DICGC.
There have been frequent demands for raising this cover as it is seen as too small a comfort to the depositors in case of bank failures. Andhra Pradesh has recently suggested the Central government that the existing deposit insurance cover of Rs1 lakh should be raised to Rs 15 lakh. However, the Centre, in consultation with the DICGC, has rejected this suggestion. “At present, there is no such proposal to revise the deposit insurance cover,” Shiv Pratap Shukla, Minister of State in the finance ministry, said in response to a query in Lok Sabha earlier this month.
“The proposal has been examined in consultation with the Deposit Insurance and Credit Guarantee Corporation. DICGC has informed that as per the Core Principle 8 of Effective Deposit Insurance prescribed by the International Association for Deposit Insurance (IADI), coverage should be limited, credible and cover the vast majority of depositors but leave a substantial amount of deposits exposed to market discipline,” Shukla said.
“As on March 31, 2018, 92 per cent of the deposit accounts in number and 29 per cent of the deposit in value are covered by DICGC. This is higher than the guidance of IADI which recommends coverage of 80 per cent in number of accounts and 20-30 per cent in value terms. Increase in the insurance cover also requires a higher premium based on risk classification of the insured bank,” he said. DICGC is a wholly owned subsidiary of the Reserve Bank of India.
The cost of deposit insurance in India is borne entirely by the insured banks, which pay premium of Rs 10 paise per annum per Rs 100 of deposits. Depositors do not pay any premium for the cover. Any increase in the cover is seen as affecting disproportionately the larger and the stronger banks, which will have to bear higher premium and cross-subsidise smaller and weaker banks facing relatively higher prospects of failing.
While the last deposit insurance claim settled with respect to a commercial bank was in 2002, the DICGC has been compensating depositors each year for failure of cooperative banks.
So an increase in the deposit insurance cap is seen as more beneficial to the cooperative banks that have been failing each year than commercial banks, which pay the bulk of the premium for the cover.
To overcome these challenges, a committee chaired by Jasbir Singh in 2015, in its report submitted to the Reserve Bank of India, suggested introduction of risk-based premium for banks.