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Banks have opposed the Damodaran Committee's proposal for a five-fold increase in deposit insurance cover as it could have serious cost implications for them due to higher premium outgo.
They have represented to the Reserve bank of India that the current deposit insurance cover per capita gross domestic product in India is adequate when compared with the global benchmark.
The RBI's Committee on Customer Service in Banks (chaired by former SEBI Chief Mr M. Damodaran) had, in August 2011, recommended that the deposit insurance cover should be raised five-fold to Rs 5 lakh from Rs 1 lakh so as to encourage individuals to keep all their deposits in a bank convenient for them.
Banks, under the aegis of the Indian Banks' Association, have buttressed their case against a hike in deposit insurance cover using RBI's own data.
Current levels
According to the RBI, at the current level, the deposit insurance cover in India works out to 1.63 times per capita GDP as on March 31, 2011. This is comparable with the international benchmark of around 1-2 times per capita GDP prior to the financial crisis.
Another reason why commercial banks are not favourably inclined to an increase in deposit insurance cover is that smaller banks, especially from the co-operative sector, could possibly use this fact and the above average deposit rates that they invariably offer to lure depositors into their fold.
“There is a moral hazard involved in raising the deposit insurance cover five-fold,” said Mr K. Unnikrishnan, Deputy Chief Executive, IBA. Moral hazard could arise because a financial intermediary does not take full responsibility for the consequences of its actions. Hence, it has a tendency to act less carefully than it otherwise would, leaving the other party (depositors) to bear the brunt of its actions.
Case for halving
Commercial banks also want the deposit insurance premium halved to 5 paise per deposit of Rs 100 from the current 10 paise as there are hardly any claims from them on the Deposit Insurance Credit Guarantee Corporation, the wholly-owned subsidiary of the RBI.
The deposit insurance premium that commercial banks are paying is cross-subsidising the claims arising from the co-operative banking sector, said a banker.
Commercial banks, including regional rural banks and local area banks, account for about 93 per cent of the total deposit insurance premium paid to DICGC, with co-operative banks accounting for the rest.
Commercial banks and co-operative banks paid deposit insurance premium aggregating about Rs 5,000 crore in FY-11.
During 2010-11, the Corporation settled aggregate claims for Rs 379 crore in respect of one commercial bank (supplementary claim) and 73 co-operative banks (28 original claims and 45 supplementary claims) as compared with claims for around Rs 655 crore during the previous year.
In the current financial year so far, DICGC has paid depositor insurance claims aggregating Rs 144 crore on account of eight co-operative banks.
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