Enhancing Insurance Coverage for Bank Deposits

Reserve Bank of India (RBI)’s capping of withdrawals from the Punjab and Maharashtra Cooperative (PMC) Bank at ?1,000 has led to hardships for people who want to withdraw their deposited money from the bank. It also brought into focus, once again, the deposit insurance cover provided by the Deposit Insurance and Credit Guarantee Corporation (DICGC).

• According to RBI, deposit insurance in India covers 92% of the total number of accounts but only 28% of the total banking deposits.
• The Deposit Insurance and Credit Guarantee Corporation (DICGC) provide insurance cover to deposits in all commercial banks.
• Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly owned subsidiary of Reserve Bank of India was in operation since 1962 for this purpose.
• The Corporation insures all bank deposits, such as savings, fixed, current, and recurring.
• There are some exceptions like deposits of foreign governments, deposits of Central/ State Governments, deposits of State Land Development Banks with State co-operative banks, and inter-bank deposits.
• The Financial Resolution and Deposit Insurance (FRDI) Bill, which was junked by the government last year, had argued a higher share of deposit insurance for depositors. It had also said that financial firms are different and hence an orderly winding-up process of a financial institution be put in place.

How to prevent Bank Run and protect depositor’s interests?

• The insurance limit of ?1 lakh, set in 1993, needs to be raised to a higher amount, with some suggestions being made to raise it to ?15 lakh, which will cover 90% of the accounts completely.
• The lack of DICGC coverage for deposits at NBFCs (many of whom the RBI regulates) and primary cooperative societies. These entities often serve vulnerable sections and their depositors must not be left in the lurch in case of a crisis. 
• The customers who want more coverage than the statutory cover on their deposits should be able to purchase this by paying additional premium. This option should be extended directly to banks that wish to increase the coverage of deposits to above the statutory requirements.
• The current DICGC cover is that the ?1 lakh insurance amount only needs to be released if a bank goes belly up. Without liquidation of the bank, no liability accrues on the insurance company to pay such a claim. The flaw in this scheme is obvious today — the ‘freezes’ in withdrawal directed by the RBI essentially cut the depositor’s access to his money. Hence, during such periods, at least the statutory amount should be released. This will go a long way in preventing bank runs, which could be triggered when customers get alarmed about the ability of banks to repay their deposits.
• Currently the DICGC charges a flat 0.1% insurance premium on the deposits of banks. However, as suggested by an RBI panel in 2015, premium should be based on differential risk based on the lending practices of the bank, among other things. An SBI report states that 93% of the premium collected by the DICGC in 2018-19 came from commercial banks (public sector: 75%, private sector: 18%), but over 94% of the claims settled (ever since the inception of the DICGC) have been those of cooperative banks. Clearly, poor governance in cooperative banks has been cross-subsidised by the better-performing commercial banks.
• Bringing private sector insurers and re-insurers into the deposit insurance segment could drive down premium prices.