India’s Bank Deposit Insurance

Overview: Purpose and Current Framework

• Objective: Protect depositors and ensure financial stability during banking crises.
• Administered by: Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the RBI.
• Current Insurance Limit: ₹5 lakh per depositor, per bank (last revised in 2020).
• Coverage (2023-24):
  • By Number of Accounts: 98% covered
  • By Value of Deposits: Only 43% insured

Key Issues and Gaps in the Deposit Insurance Framework

• Value Disparity:
  • 2% of depositors hold 57% of total bank deposits.
  • These high-value depositors are left largely unprotected under the current cap.
• Declining Coverage Ratio:
  • Down from 50% in 2020-21 to 43% in 2023-24.
  • Indicates growing vulnerability among large depositors.
• Global Comparison:
  • India lags behind BRICS peers:
    • Brazil: ₹42 lakh equivalent
    • Russia: ₹12 lakh equivalent

Reactive vs. Proactive Shifts

• Past Revisions:
  • 2020: After PMC Bank crisis (raised from ₹1 lakh to ₹5 lakh)
  • 1993: After Bank of Karad failure (raised from ₹30,000 to ₹1 lakh)
• Critique: Changes have often been reactionary, not strategic.
• Current Debate: Another hike under consideration—motivated by:
  • Competition from mutual funds and equities
  • Increased household savings in deposits (grew from 28% to 41% between 2021–2024)
  • Recent collapses like New India Co-operative Bank

Risks of Raising the Cap

• Moral Hazard:
  • Depositors may neglect due diligence on bank health.
  • Banks may engage in riskier lending or investment, knowing deposits are insured.
• Policy Dilemma: Balance between instilling trust and avoiding complacency.

Rethinking the Deposit Insurance Philosophy

• From Backstop to Trust Anchor:
  • India needs a comprehensive, calibrated deposit insurance framework.
  • Must cater to both retail and high-value depositors.
  • Reinforce confidence without encouraging systemic risk.
• Policy Recommendation:
  • Shift from crisis-response to risk-prevention.
  • Align deposit insurance with rising savings, inflation, and financial complexity.