The premium to be paid by banks to the Deposit Insurance and Credit Guarantee Corporation (DICGC), following the five-fold hike in deposit insurance to Rs 5 lakh from Rs 1 lakh, is set to rise by 20 per cent.
Reserve Bank Deputy Governor B P Kanungo on Thursday said the premium will increase from 10 paise to 12 paisa per Rs 100 for the time being. “The impact on banks’ balance sheets is not likely to be much,” he said in the post-policy press conference.
Given the size of insured deposits is likely to increase, the deposit insurance premium paid by banks will increase the operating expenses of banks and will be negative for their profitability to the extent they are not able to pass it on to the bank customers. As on March 31, 2019, 28 per cent of deposits (in value terms) and 92 per cent of depositors (in terms of number of accounts) were covered by deposit insurance, which is likely to increase to 40-50 per cent.
The government has proposed to increase the insurance cover on bank deposits from Rs one lakh to Rs five lakh in the Union Budget in a bid to instill more confidence and trust of the public in the banking system.
In September 2019, the RBI slapped curbs on Punjab and Maharashtra Cooperative Bank Ltd (PMC Bank), a leading cooperative bank headquartered in Mumbai with deposits of over Rs 11,000 crore, appointed an administrator and superseded its board of directors, sending shock waves among thousands of its depositors. Panic-stricken customers rushed to bank’s branches across the state and were unable to withdraw more than Rs 1,000, leading to widespread protests.
DICGC, a subsidiary of the RBI, used to give insurance cover up to Rs one lakh deposits in banks. Banks will now insure deposits up to Rs 5 lakh per customer with the DICGC as per the Budget proposal. It has surplus funds of Rs 87,995 crore as of March 2019, according to the Annual Report of the Corporation. It reported Rs 152 crore worth of claims in 2018-19 as against Rs 183 crore in the previous year.
When a bank collapses, depositors will get Rs 5 lakh from the Corporation. However, now depositors holding more than Rs 5 lakh in their account have no legal remedy in case of the collapse of the bank. Irrespective of the deposit amount, be it Rs 25 lakh or Rs 5 crore, the depositor will now get only Rs five lakh if a bank collapses.
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