FRDI: Deposit insurance may need to rise up to Rs 15 lakh to cover at least 90% of FDs
Under the current rule, any amount of more than Rs 1 lakh in a deposit account could be forfeited in the event of a bank failure.
The government may have to raise the deposit insurance cover by more than 12 times in the proposed insurance bill if it has to ensure a safety net for at least 90 per cent of deposits, which was the base when the limit was last revised a quarter century ago.
In 1993, when the limit for providing deposit insurance was set at Rs 1 lakh, as much as 90 per cent of the accounts had that much or less amount. But as of March 2016, that share had shrunk to 67 per cent. If 90 per cent of the deposits were to be still covered, then the threshold should now have to go up to at least Rs 15 lakh from Rs 1 lakh.
“If we adjust inflation since 1993, deposit insurance requires a substantial jump. Where the amount should be — that is obviously open for debate but it should at least cover 60-70 per cent of the total deposits,” said Kuntal Sur, partner, financial services (risk and regulation leader), PwC India. “I don’t see 90-100 per cent of the overall deposits being covered.”
Under the current Deposit Insurance and Credit Guarantee Corporation Act, 1961, any amount of more than Rs 1 lakh in a deposit account could be forfeited in the event of a bank failure. Under the proposed law, a resolution corporation would be set up and it in consultation with the Reserve Bank of India would fix the threshold for deposit insurance.
This suggests that the government is considering increasing the insured amount in deposits since the compensation was last fixed almost 25 years ago. RBI data show that only about 30 per cent of the outstanding deposits by value — totalling about Rs 30 lakh crore — was insured as of March 2017.
As of March 2016, 97 per cent of deposit accounts had Rs 15 lakh or less. This amounted to about 45 per cent of the total deposits by value in the banking system.
The balance 55 per cent was from accounts having more than Rs 15 lakh. Of this group, 38 per cent had more than Rs 1 crore.
“Rs 1 lakh deposit insurance is hardly anything in today’s context, and it’s been nearly 25 years that amount was revised,” said Karthik Srinivasan, group headfinancial sector ratings, ICRA.
“Keeping in mind inflation, cost of living, I personally believe Rs 5 lakh is a respectable number.” The proposed Financial Resolution and Deposit Insurance Bill is expected to seek to raise the minimum threshold of deposit insurance from Rs 1 lakh. The final amount will be decided after a consultation between the RBI and the resolution corporation.
Currently, banks have to pay a premium of about 10 paise per Rs 100 insured. Any hike in the threshold would raise the amount of premium that banks will have to shell out. “But, even under the new regime, you can expect that the cost of deposit insurance for banks should go up ideally,” said Sur.
However, the premium cost could also be charged to the depositors. “Whether the banks should bear the premium amount or should the charges be passed on to the deposit holders is a debatable topic. As of now it is been borne by the banks,” said Srinivasan.