A person’s aggregate deposits in a bank, including fixed deposits, are insured up to ₹1 lakh by the Deposit Insurance and Credit Guarantee Corp. (DICGC), a wholly-owned subsidiary of the Reserve Bank of India (RBI). So in case of a default by scheduled commercial or cooperative banks, DICGC will pay up to ₹1 lakh to each depositor. After the recent crisis that hit the Punjab and Maharashtra Co-operative (PMC) Bank, there have been demands from various quarters that the deposit guarantee limit, which was last revised in 1993, be increased. Ashwini Kumar Sharma asked experts if it’s the right time to do so
Anil Gupta, Vice-President and sector head, financial sector ratings, ICRA
Increase in cover to boost depositor confidence
DICGC covers only 28% of the deposit amount by value; about 92% of depositor accounts are insured. Also, about 70% of total deposits by value in the Indian banking system are with public sector banks, which are perceived to be quasi-sovereign and government’s strong support will ensure safety of the deposits.
It must be noted that DICGC charges an insurance premium from banks which is 0.1% of the insurable deposits of each bank. If the amount of insurance has to be increased, then the premium charged will also increase, which in turn will either be passed on by banks to depositors by way of lower deposit rates or to the borrowers in the form of higher lending rates.
While the share of private banks has been increasing, precedence shows that failure of private banks has not led to loss for depositors.
Nonetheless, to further strengthen and improve depositor confidence, the increase in deposit insurance limit can be considered as the last revision was done in 1993 to ₹1 lakh per depositor from ₹30,000 earlier which was applicable since 1980.
Shalini Warrier, Chief Operating Officer and business head - retail, Federal Bank
Make insurance cover relevant by linking it to inflation
Deposit insurance needs deep deliberation. DICGC was formed in 1961 with a sum assured of ₹1,500 per deposit. Since nationalization of banks, mergers and acquisitions during critical junctures in the sector has helped avoid bank failures. Still, the sum assured went up by more than 6,500% to ₹1 lakh between 1961 and 1993.
To protect depositors, a few critical steps are required, including making the insurance cover relevant in the current scenario and linking it to inflation, as well as re-considering the junked Financial Resolution and Deposit Insurance (FRDI) bill.
RBI’s latest figures indicate that while all bank accounts are covered under DICGC, only 28% of the total number of bank deposits are covered under deposit insurance.
However, there is another view that regardless of the bank type and the deposit amount, the premium equivalent remains the same for all and a higher cover would mean higher premiums. The one-size-fits-all approach does not price the risk appropriately, given operational quality, governance standards, ratings and other factors.
Madan Sabnavis, Chief Economist, CARE Ratings
It will ensure depositors continue to save in banks
Deposit guarantee of ₹1 lakh available at present is useful for small savers. However, if the sum of savings and fixed deposits are taken together, the amount of insurance cover will tend to be very low for households which normally park most of their savings in these accounts.
It is normally assumed, and quite rightly too, that banks will never fail and hence there is an implicit guarantee, which leads to the assumption that bank deposits are totally safe. While this may be true for public sector banks, it isn’t for other banks. This risk has never been highlighted because we have not had instances of commercial banks failing, leading to depositors losing money as such banks are normally merged with stronger ones with RBI’s intervention.
There is a need to increase the insurance limit for deposits. As deposits are the base that provide banks with lending opportunity, there has to be maximum protection. The limit can be increased to ₹5 lakh. Explicit insurance should definitely be provided for a larger amount to ensure that deposit holders continue to channel their savings to banks.
Lovaii Navlakhi, Managing director and Chief Executive Officer, International Money Matters
People need to be aware of risks related to bank deposits
If you invested ₹1 lakh in a bank in 2009 for 10 years at the then prevailing rate of 7.75% per annum, the cumulative amount would be ₹2.10 lakh today. So the amount covered under deposit insurance in 2009 would not be covered now. Going by this example, the amount under coverage would have to be doubled every 10-12 years, even if interest rates drop to 6% per annum.
From a depositor’s point of view, this is warranted and right, but from DICGC’s point of view, the costs of increasing it will skyrocket. The way out is to ensure financial literacy at the grassroots level—ensure that depositors are aware of all the risks in bank deposits. Some of these risks are reinvestment risks (interest rate on renewal may not be the same), single product investment risks (much like buying a single stock with all your wealth), and erosion of real returns on account of tax and inflation.
One way can be to hike the guaranteed amount to ₹2 lakh now; and reduce that to ₹1 lakh again in five years, as the investing public becomes financially more literate. Goal-based planning always works.