RBI steps in to raise deposit insurance cover for customers from Rs 100,000

RBI asks arm to create model that'll make banks pay premiums depending upon their risk factor

The Reserve Bank of India (RBI) has told its subsidiary Deposit Insurance and Credit Guarantee Corporation (DICGC) to create a risk-based system for collecting premiums from banks to cover the deposit insurance of customers.

The RBI feels that a move to charge banks, depending upon how risky they are, is a prerequisite for hiking the bank deposit insurance limit of customers from Rs 1 lakh at present, a central bank executive said. According to sources, the central board of the RBI, which met in Chandigarh on October 11, had a detailed deliberation on the proposal to hike the deposit insurance of bank customers. 

“However, the threshold cannot be hiked without a higher premium based on a risk classification of the insured bank because any move otherwise will be seen as a moral hazard,” the executive said.

Bank deposits up to Rs 1 lakh are insured by DICGC, which is a wholly-owned subsidiary of the Reserve Bank of India (RBI) and guarantees depositors’ money. Deposit insurance covers commercial banks, local area banks, regional rural banks, and co-operative banks. In case a bank fails, DICGC pays the insured amount to the depositor. Since April 2005, DICGC collects a flat premium of 10 paise per deposit of Rs 100 from banks. The central board discussed whether banks could be charged a premium, depending upon their risk profile as against a flat rate, which is done now.

“The RBI has written to DICGC, asking it to consider a risk-based premium for the deposit insurance of banks and suggest a suitable model,” the source said.

However, at the meeting there was a view that differentiating banks on the basis of their risk profile had the potential of creating panic in the public and could lead to a “run on the bank as depositors may feel their money is unsafe with banks being put in the high risk category”, the source said.

The central board discussed whether different premiums could be charged from different categories of banks, especially co-operative banks and commercial banks. 

Official data showed, between 2009-10 and 2018-19, only one of the 429 claims pertained to a commercial bank and the rest were meant for co-operative banks. The single claim, which was also a supplementary claim, was related to Sikkim Bank Ltd, which merged with Union Bank of India in 2000. In terms of amount, it was 0.001 per cent of the claim worth Rs 2,134 crore settled by DICGC since 2009-10. 

“Historically, deposit insurance claims on the DICGC have generally originated on account of failure of co-operative banks, as these institutions have been more susceptible to frequent failures due to a number of factors. It is worth mentioning that the last claim settled in respect of a commercial bank was way back in 2002,” said a report of the RBI-appointed committee on “differential premium system for banks in India”, chaired by Jasbir Singh.

It said, as a result, a perception of cross-subsidisation in operating the deposit insurance system had gained currency.

Insurance cover for bank deposits was last revised in May 1993 to Rs 1 lakh from Rs 30,000. This was done after 13 years. Many nations adopt a risk-based premium model for deposit insurance. The countries include the US, Canada, Germany, France, and Argentina.