 "M Rajeshwar Rao, Deputy governor, RBI")
M Rajeshwar Rao, Deputy governor, RBI
A periodic upward revision in the uniform deposit insurance coverage of Rs 5 lakh is necessary, as India’s growth and formalisation is likely to lead to a significant rise in both primary and secondary deposits, which might create a gap between the ideal insurance reserve requirement and the available reserves, said M Rajeshwar Rao, deputy governor, Reserve Bank of India, on Monday.
Currently, in India, there is a uniform deposit insurance coverage of Rs 5 lakh per depositor of each insured bank.
“Considering multiple factors like growth in the value of bank deposits, economic growth rate, inflation, increase in income levels, etc., a periodic upward revision of this limit may be warranted. This means that the deposit insurer has to be mindful of the additional funding and needs to work out suitable options to meet the same,” said Rao, speaking at the IADI Asia-Pacific Regional Committee International Conference.
Rao also highlighted that having full insurance cover for deposits appears to be ideal for depositors and also helps to avoid bank runs.
“However, this is likely to be a suboptimal solution given the associated moral hazards and financial non-viability,” he said, adding that the economic viability of an alternative targeted insurance approach with full coverage for certain sections of customers like small depositors and senior citizens, or pooled deposits of smaller depositors, based on a careful evaluation of the constructs, costs, and benefits of such an approach, can be examined.
According to an IADI survey, the median deposit insurer covers 43.1 per cent of the value of eligible deposits in India. Additionally, the number of fully protected accounts constitutes 97.8 per cent as of March 31, 2024, of the total number of accounts in the banking system, as against the international benchmark of 80 per cent. While the scope and coverage appear satisfactory at this juncture, there are likely challenges going forward, Rao said.
He further highlighted that the role of DICGC in supporting consolidation in the urban cooperative banks (UCBs) sector is a matter which requires greater focus under least-cost resolution principles, given its importance in driving financial inclusion and credit delivery to those with limited means.
He emphasised that there is a need to consider whether coverage of digital deposit-like products should also be an option for the deposit insurer. Recently, a committee formed by RBI for the review of customer service standards in its regulated entities recommended extending deposit insurance cover to money kept in wallets of prepaid card issuers. “While there is clearly no ‘one-size-fits-all’ solution to cover digital products, we need to choose a suitable approach which is consistent with the primary objective of the deposit insurance function,” he said.
Meanwhile, Rao suggested that as banks introduce more innovative products and new risks potentially impact deposit growth, a risk-based premium would be a more effective option for the deposit insurer to ensure the robustness of its finances and enhance its ability to adapt to changing financial conditions.
Currently, in India, as is the case globally with 96 per cent of deposit insurance systems, an ex-ante funding system, wherein the deposit insurer maintains a deposit insurance fund, primarily financed by premiums collected from the insured institutions, is used to pay the depositors in the event of a bank failure.
First Published: Aug 19 2024 | 4:24 PM IS