Context:
Deposit Insurance and Credit Guarantee Corporation of India (DICGC) covers every depositor up to ₹5 lakh in all banks.
- Proposed Increase: The government is considering raising this limit to an ₹15 lakh threshold in order to strengthen depositor protection.
- Past Increases in Insurance Coverage: The last increase in deposit insurance was done in February 2020 (from ₹1 lakh to ₹5 lakh) and this was just the second increase that has occurred since 1993.
Challenges and Considerations
- Should Deposit Insurance Stay Updated?
- RBI Deputy Governor M Rajeshwar Rao states that a growing economy and increasing deposits from banks require the insurance limit to be updated now and then.
- The Past Revised
- Since in 1968 the insurance limits were revised six times, these have stayed long silent since then after the last revision of 1993.
Is a Shift to Risk Based Deposit Insurance Needed?
- Current Premium Structure
- Flat 12 paise per ₹100 of deposits annually.
- Proposal
- Premiums on deposit insurance should be determined by a bank’s risk profile (similar to credit ratings for bonds).
- Benefits That May Arise
- More governance since banks will be incentivized to maintain strength.
- Market discipline
- creditors may prefer to deposit in banks with good ratings.
- Reasons for Concern
- May lead to flight of deposits from weaker banks, leading to systemic instability.
- Calls for gradually designing to discourage flight by incentivizing stronger banks.
Should Deposit Insurance Cover NBFCs?
- NBFCs D currently cannot avail of DICGC coverage.
- Need for this
- Deposits securitised by NBFC took a jump of 20.8% in FY24 reaching ₹1.02 trillion.
- Financial turbulence in NBFCs creates panic withdrawals.
- Regulatory Dilemma
- RBI has exercised mild restriction on NBFC deposit growth to protect investors.
- Past committees (Capoor Committee, 1999) have deliberated on the possibility of extending deposit insurance to NBFCs, but no decision was made.
Global Context: Where India Stands
- India 3rd Overall in Asia Pacific (for insured deposits provided to depositors)—with a ratio of 46.3% of total deposits.
- Countries with More Coverage
- Japan (69.1%)
- Korea (51.7%)
- US (56.6%)
The Road Ahead
- Should deposit insurance limits be regularly reviewed for changes in the economy and deposit trends?
- Promote gradual shift to risk based premiums in order to avert flight of deposits from weaker banks.
- Possibly extend coverage to deposits in NBFCs to protect against systemic risk.
- Higher governance standards in cooperative banks should be imposed to reduce the chances of failure.
An appropriately calibrated deposit insurance program shall prove imperative for financial stability and depositor confidence.
