Deposit insurance covers deposits in all banks that are licensed to operate by the Reserve Bank of India and registered with Deposit Insurance and Credit Guarantee Corporation (DICGC). Today, around 2,000 banks including commercial banks, foreign banks in India, local area banks, regional rural banks and co-operative banks are covered by deposit insurance.
From the 1930s to 1960s, many major banks in India failed, leading to the introduction of the Deposit Insurance Bill in 1961 and formation of the DICGC in 1962, primarily to protect the savings of depositors. The initial cover was set at ₹1,500 per person. This was raised to ₹5,000 in January 1968, ₹10,000 in April 1970, ₹20,000 in January 1976, ₹30,000 in July 1980 and ₹1 lakh from May 1993.
The said deposit insurance is restricted to ₹1 lakh per depositor per bank and does not cover amounts above ₹1 lakh. To calculate this limit of ₹1 lakh, all accounts held by the depositor across different branches of the same bank are aggregated. In addition, the ₹1 lakh limit includes both the principal and any accumulated interest in each such account. Finally, the limit is not restricted to “deposits” such as fixed deposits and recurring deposits but covers any “balance” in any account held by the same person. For example, balance in savings accounts, balance in current accounts, fixed deposits and so on are all added up.
Just a pittance
Against this backdrop, the said deposit insurance cover is misleading, minuscule and offers depositors little coverage. And, if you factor in inflation, the cover offers nothing at all. What’s more, the banks that pay the premium to obtain this cover on behalf of the depositors also lose as the banks are required to pay the DICGC an annual premium at a flat rate of about 10 paise for every ₹100 worth of deposits that they hold.
In essence, the premium paid for obtaining such insurance has no bearing on the sum insured as a single depositor is only covered for a maximum of ₹1 lakh across all banks whereas the banks pay a premium on total deposits placed by depositors in all banks. This is clearly wrong and must be rectified either by increasing the deposit insurance limit or calculating the premium based on a sum insured per depositor of ₹1 lakh.
Deposit insurance levels in India clearly needs to be increased and brought in line with deposit insurance offered in other countries and coverage as a percentage of deposits in the banking system today. In fact, coverage levels in India (of ₹100,000 or approximately $1,500) when compared with other countries are quite low.
For example, Brazil has a coverage limit of around $79,300, Canada insures up to a maximum $75,000, Switzerland upwards of $100,000 per depositor and the US offers an insurance coverage of $250,000.
The International Monetary Fund recommends that the yardstick for the insurance cover should be twice the per capita income. This would mean the cover in India should be ₹250,000 as against the current cover of ₹100,000. If we consider inflation and use the Income Tax index which is used for capital gains the cover should be ₹500,000. Given the push to reduce physical cash holdings in favour of more deposits, this should be set at an even higher level of ₹10 lakh.
Coverage ratio
Another aspect that requires immediate attention is the coverage ratio. While around 92 per cent of the 1,680-odd million accounts were covered in 2015-16, only 30 per cent of the amount in these accounts was insured.
The insurance cover, which was about 35 per cent five years ago and a much higher 60 per cent a decade ago, has been steadily decreasing in the last couple of years. The primary reason lies in the sharp jump in high-value deposits, given the growing income levels in India. From about ₹40,000 average amount of each deposit in 2005-06, the average amount in each deposit account has moved upwards of ₹60,000 in the last three to four years. This has eroded the coverage ratio significantly and needs to be improved. DICGC also has substantial resources as the claims are minimal. Today it is sitting on reserves of a whopping ₹54,891.9 crore and has cash and investments worth ₹61,283.8 crore (as per accounts dated March 31 2016). There needs to be some thinking on how to use these funds.
In summary, with the greater push towards a cashless economy, moving the unbanked towards the banking sector, digital payments and such, combined with the rise in deposits at banks, it is time to increase the insurance cover available to depositors, rationalise the anomaly between premia paid and coverage and ensure that monies placed at banks have adequate coverage.
In this context, it is pertinent to action the following points – a) An increase in the cover for deposit insurance to international levels. It should go up to ₹10 lakh b) Banks to pay only for the cover and not for total deposits c) Use of the resources of DICGC for depositor education, improving operations of small banks and other related purposes and maybe to shore up capital of public sector banks indirectly (to avoid conflict of interest) d) Increase coverage ratio.
(The writers are partners at Grant Thornton India. The views are personal. The article first appeared in The Hindu BusinessLine.)