Reserve Bank of India’s deputy governor M. Rajeshwar Rao stressed the need to review the existing deposit insurance coverage in line with the current economic reality, growth, inflation, people’s income, and the higher value of bank deposits. He made the comments in an event hosted by the Deposit Insurance and Credit Guarantee Corporation (DICGC) last week.

Rao said the scope and coverage are satisfactory for now but looking at the economic landscape, there would be challenges. As of March 31, 2024, 97.8 per cent of the accounts were protected, better than the global benchmark of 80 per cent, but there is a need to revise the limit, he said.

“Today we count India to be amongst the fastest growing large global economies. This healthy growth rate is expected to continue in the near future. A growing and formalising economy can naturally be expected to see a sharp increase in both primary and secondary bank deposits, driving a wedge between the desirable insurance reserve requirement and the available reserve,” said the deputy governor in his address. Rao stressed, “The deposit insurer has to be mindful of the additional funding and needs to work out suitable options to meet the same.”

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Can Risk-Based Premium Be A Solution?

The governor also broached the issue of risk-based premiums (RBP) again. In India, the deposit insurer maintains a deposit insurance fund, mainly financed by premiums collected from the insured institutions. In case of a bank failure, depositors are paid from this pool.

The premium is collected either at a flat rate or differentiated rate based on the individual bank’s risk profile. While flat rate structure is easy to understand, it is sometimes understood as “antithetical to the concept of insurance” because it does not factor in the risk a single bank may pose due to excessive risk-taking to the insurance system.

Committees set up in the past have recommended RBP but their recommendation could not be adopted. Rao said, “There is also a dilemma that introduction of an RBP can render the riskier institutions more vulnerable to deposit flight and shorten the distance to failure”. He said, “We need to recognise that with greater innovations in product offerings by banks, newer risks can impact deposit growth. RBP would be a better option for the deposit insurer to ensure robustness of its finances and enhance its capability to operate in changed financial milieu. It is therefore important for us to carefully examine the option of adopting risk-based deposit insurance cover”.

What Could Be The Viable Solution?

While the idea of full insurance cover looks good to avoid bank runs, it is a sub-optimal solution and financially non-viable. “At the same time, we could also examine the possible economic

viability of an alternate targeted insurance approach with full coverage for certain sections of the customers like small depositors, senior citizens, etc., or pools deposits of smaller depositors based on a careful evaluation of the constructs, costs, and benefit of such an approach”, he said.

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The DICGC insurance cover protects small depositors from losing money in the event of a bank’s failure. It provides a coverage of up to Rs 5 lakh on deposits, including the principal and interest amount. It insures all deposits, including savings, current, fixed, recurring deposits, etc., except certain deposits of foreign governments, central and state governments, state land development banks, state cooperative banks, inter-bank deposits, deposits received outside India, and any amount the corporation has exempted with approval of RBI. From 287 banks registered under the scheme in 1962, their number grew to 1,997 in March 2024.