Banks peeved over DICGC premium hike

Commercial banks are up in arms over the Deposit Insurance Credit Guarantee Corporation's (DICGC) move to double the deposit insurance premium from five paise to 10 paise per Rs 100 worth of deposits.

Senior bankers said they should not be penalised for the failure of co-operative banks and subsidise the cooperative sector.

The management committee of Indian Banks' Association took stock of the situation early this week. A view has emerged that since a proposal to restructure the Corporation and convert it into Bank Deposit Insurance Corporation on the lines of Federal Deposit Insurance Corporation (FDIC) of the US was under the consideration of the Reserve Bank of India and the government, it will not be proper to consider enhancement in the deposit premium at this stage.

Bankers feel the issue of refixing the premium could be taken up as part of financial restructuring of the corporation.

DICGS initially had proposed a three-fold increase. Faced with stiff resistance from bankers, it has implemented a two-stage increase in doubling the charge.

In the first phase, the premium has gone up from five paise to 8 paise per Rs 100 from 2004-05. It will go up further to 10 paise next year. Only term deposits are covered by DICGC up to Rs 1 lakh per depositor. However, banks pay the premium on the entire amount.

Following the hike, the cost of funds for banks will go up. For a bank with a deposit base of Rs 10,000 crore, the premium burden will increase from Rs 5 crore as of now to Rs 10 crore.

In fact, banks are pitching for differential risk-based premium as recommended by Jagdish Capoor. The risk-based pricing of deposit insurance premium is expected to minimise the moral hazard implicit in the present system of charging uniform premium for strong and weak banks leading to cross-subsidisation of risk premium of weak banks by stronger banks.

The weak banks stand to gain more at the cost of stronger banks, since they have to pay premium which is less than commensurate with their risk.