Context:
The Reserve Bank of India (RBI) has imposed withdrawal restrictions on New India Cooperative Bank, Mumbai and therefore drawing attention to the broader issue of inefficiencies and mismanagement in banks. It has raised the topic for sufficient discussion on what utility these cooperative banks serve in the Indian banking set-up, with demands for greater regulation.
Issues Banks Are Struggling & Depositors with
- Trust is of Essence for Banks
- Banks are to hold deposits in the short-term and advance loans on a long-term basis. This leads to asset liability mismatch for banks.
- Customers may move around their funds through digital means of transactions posing ever greater systemic risks.
- Mere rumors are enough to send some banks into a panic-notably, the 2023 Silicon Valley Bank (SVB) crisis in the U.S.
Current Deposit Insurance Contributors
- The Deposit Insurance and Credit Guarantee Corporation (DICGC) grants insurance coverage of ₹5 lakh to every account holder.
- However, only 43.1% of accessible deposits are effectively covered, thus raising serious concerns regarding the depositors’ safety.
- This limit is being looked at by the government for enhancement because it would further safeguard the financial security of citizens.
Suggestions to Improve for Greater Stability
- Increase Deposit Insurance Coverage
- Extending coverage to all individual accounts will instill confidence among depositors and thus avert any run on the bank.
- The depositor should not have to over analyze health of the bank on a continuing basis, that is up to the regulators to ensure.
- Cost Sharing for Stability
- The upgraded insurance coverage should be a shared cost between the depositors, banks, and the government.
- This will make sure economic stability is achieved without unduly burdening any one of the parties.
- Strengthened Regulatory Oversight
- Higher insurance coverage must be matched by rigorous monitoring by regulators to avoid undisciplined banking.
- Lessons from SVB
- U.S. extended deposit insurance to all SVB deposits, thus averting a larger banking crisis.
- Similarity will give equal footing to public and private commercial banks in India.
- Preventing Moral Hazard
- A guaranteed safety net could lure banks into utmost risk.
- Stringent regulations ought to be established to prevent mismanagement and to hold bank management accountable.
A secure banking system is of utmost importance to having a stable economy. Enriching the coverage of deposit insurance coupled with a stronger regulatory microphone will provide adequate protection to depositors and stave off monetary crises. However, these protective measures should also guard against moral hazard and promote responsible banking behavior.
