Deposit insurance may be raised to Rs 5 lakh; new wholesale plan in offing

New scheme likely for wholesale at Rs 25 lakh; proposals could figure at RBI board meet

Bank deposit insurance in the country may be split into two categories, with retail cover being raised to Rs 5 lakh, from the current level of Rs 1 lakh; and a new scheme being introduced for wholesale depositors at Rs 25 lakh. 

When given effect, it will be the first upward revision in deposit insurance after 1993. The last reset was on May 1, 1993, after the Bank of Karad went down in the securities scam of 1992. The reset prior to this at Rs 30,000 was given effect to on July 1, 1980. 

A well-placed regulatory official said he “more than hoped the Ministry of Finance will hike the deposit insurance limit. It is long overdue”, but added he was not aware if the new scheme for wholesale depositors would also be announced along with the hike in deposit insurance (as we know it now) to Rs 5 lakh. It was, however, made clear that “it is unlikely that the premium paid per Rs 100 by banks for deposit insurance to the Deposit Insurance and Credit Guarantee Corporation (DICGC) at 10 paise will be raised so as not to increase their burden”.

It was pointed out that the matter might figure when the Reserve Bank of India’s (RBI’s) central board met on December 13 in Bhubaneswar. There are two other proposals which may be up for consideration by the Ministry of Finance. One, that banks be allowed to obtain additional deposit insurance — over and above the proposed enhanced limits — be it for individuals or institutions by payment of an additional premium. Two, that the DICGC — a wholly-owned subsidiary of the RBI — create a separate reserve to protect the interests of depositors of banks which fail due to frauds like in the case of the Punjab & Maharashtra Co-operative Bank (PMC Bank) and the Pen Co-operative Urban Bank. It could not be ascertained if North Block and the central bank will examine the concept of risk-based premium (RBP) for deposit insurance. If implemented, it could lead to a situation wherein depositors may opt to move their deposits to safer banks if the RBP paid out is made public; or gets leaked. 

It may be recalled that RBP found mention in the Jagdish Capoor Report in 1999, and later in the Committee on Credit Risk Model (2006) set up by the DICGC. The most recent one — the Jasbir Singh Committee (2015) on Differential Premium System for Banks — was discussed at the central bank’s board meeting held on October 16, 2014. 

It was decided then that “DICGC could explore the possibility of putting in place a differential premium within the co-operative sector linking it to governance and risk profile of co-operative banks”. There was little forward movement on this subject until now.