The debacle of Punjab & Maharashtra Co-operative (PMC) Bank has brought back the focus on deposit insurance and depositor protection. While the cooperative bank has not gone into liquidation, which triggers the insurance process, the risk to depositor money cannot be ignored.
Deposit insurance is a way of ensuring the depositor of a bank gets a certain amount and only then the bank pays other parties it owes money during liquidation. In India, deposits are insured up to ₹100,000, a limit that was set in 1993 after three revisions over 25 years.
There are compelling reasons for an increase in deposit amount eligible for insurance .
First, we compare very poorly with our Asian counterparts.
The deposit insurance scheme of Philippines insures up to 500,000 pesos ($9500) per depositor and that of Thailand insures close to 5 million bahts ($160,000). In China, this insurance is for up to 500,000 yuan ($70,000) per depositor. At ₹100,00 India’s coverage is a meagre $1400.
Deposit insurance schemes have been prevalent in most countries and have been upgraded with changing times. To be sure, the insurance limit in India was also enhanced from ₹30,000. But this was 25 years ago.
Besides the Indian economy has changed drastically since 1993, with the average per capita income of Indians and financial savings improving.
Much of the incremental savings continues to flow into bank deposits despite several new financial instruments made available to the public over the years. In FY17, bank deposits formed roughly 66% of net financial assets of households, according to data from the Reserve Bank of India (RBI).