Money & Banking

DICGC allowed to hike deposit insurance coverage to ₹5 lakh

Mumbai | Updated on February 01, 2020

To bolster depositors’ confidence to park money with banks, especially co-operative banks, Union Finance Minister Nirmala Sitharaman, on Saturday, said the Deposit Insurance and Credit Guarantee Corporation (DICGC) has been permitted to hike the deposit insurance coverage for a depositor from ₹1 lakh to ₹5 lakh.

The move comes in the wake of depositors of fraud-hit Punjab and Maharashtra Co-operative (PMC) Bank not only facing hardships to get their hard earned money back but also facing uncertainty over the fate of their deposits exceeding ₹ 1 lakh.

The proposal in the Union Budget 2020-21 to up the deposit insurance cover five-fold will ensure that depositors don’t shrink away from placing deposits with smaller banks in view of the PMC Bank imbroglio.

‘To benefit smaller banks’

According to BK Divakara, former executive director of Central Bank of India, the increase in deposit insurance cover will immensely benefit smaller banks.

“I wish to inform this august House that robust mechanism is in place to monitor the health of all Scheduled Commercial Banks and that depositors’ money is safe,” said Sitharaman.

Under the provisions of Section 16(1) of the DICGC Act, the insurance cover currently is limited to ₹1 lakh per depositor for deposits held in “the same capacity and in the same right” at all the branches of a bank taken together. However, the Act also empowers the corporation to raise this limit with the prior approval of the Central Government.

The deposit insurance cover was last raised from ₹30,000 to ₹1 lakh in 1993. The corporation insures all bank deposits, such as savings, fixed, current, and recurring.

The premium rate per deposit of ₹100 is at 10 paise. With the deposit insurance cover being upped to ₹5 lakh, it remains to be seen whether the corporation will revise the deposit insurance premium upwards or it will usher in a risk-based premium regime.

In a speech in September 2015, R Gandhi, then Deputy Governor of Reserve Bank of India, observed that flat-rate premium systems have been viewed as being unfair as low-risk banks are required to pay the same premium as higher-risk banks.

“With no inbuilt incentive for higher risk banks to improve their risk profile, a flat-rate system would accentuate the moral hazard problem. Therefore, the primary objective of most differential premium systems has been to provide incentives for banks to avoid excessive risk taking, minimise moral hazard, and introduce more fairness into the premium assessment process,” he said.

Emphasising that introducing fairness into the system bolsters industry support for deposit insurance, Gandhi said a hike in cover without calibrating the premium rates to the risk profile of the insured banks only exacerbates the moral hazard.

Published on February 01, 2020

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