Money & Banking

RBI union wants govt to raise bank deposit insurance cover to ₹10 lakh

Our Bureau Mumbai | Updated on November 20, 2019

Urban co-operative banks must be brought exclusively under RBI’s jurisdiction: AIRBEA

The current bank deposit insurance coverage is woefully low and the government should increase it 10 times to ₹10 lakh, covering all types of deposits of an individual, according to the All-India Reserve Bank of India Employees Association (AIRBEA).

This suggestion comes in the context of the Reserve Bank of India (RBI) coming across major financial irregularities at Punjab and Maharashtra Co-operative (PMC) Bank, leading to deposit withdrawals being capped at ₹50,000 of the total balance in depositors’ accounts.

The need to increase the deposit insurance cover should also be seen in the backdrop of fears in various quarters of the government bringing back the Financial Resolution and Deposit Insurance Bill with the ‘bail-in’ clause, whereby depositors’ funds could be used to bail out troubled banks.

The deposit insurance cover was last upped in 1993 from ₹30,000 to ₹1 lakh. Though the bank deposits have grown by leaps and bounds, the deposit insurance cover has remained static for the last 26 years.

“It has been argued that while bank failures are few and far between and the government takes steps to save depositors by merging the failed banks with other strong banks, the failure of co-operative banks is palpable,” said Samir Ghosh, General Secretary, AIRBEA.

According to the Deposit Insurance and Credit Guarantee Corporation figures, it has paid ₹4,822 crore in claim in respect of 351 co-operative banks since inception. “While the insurance premia (10 paise per deposit of ₹100) are paid mainly by commercial banks, the money is used mostly for failed co-operative banks,” said Ghosh, and added that this is disproportionate and unbalanced.

Dual regulation

Hence, the association has demanded that instead of dual regulation of urban co-operative banks by the State government and the RBI, they should be brought exclusively under the central bank’s jurisdiction. Ghosh felt that this will also be welcomed by co-operative bank customers.

State Bank of India’s economic research department, in a recent research report, pointed out that over the years, the level of insured deposits as a percentage of assessable deposits, has declined from 75 per cent in FY82 to 28 per cent in FY18.

“Given this backdrop, we believe, there is a dire need to revisit the insurance coverage of bank deposits. In particular, the current upper limit of ₹1 lakh per depositor, we believe, has outlived its shelf life and there is a need to revisit it,” said the department’s research report Ecowrap.

“Further, over the years, the composition of bank deposits has undergone massive changes in India. In this backdrop, the report suggested that the DICGC coverage should be revised and bi-furcated into two categories – desirable coverage of at least ₹1 lakh for savings bank deposits (around 90 per cent of the total SB accounts) and desirable coverage of at least ₹2 lakh for term deposits (around 70 per cent of the total TD accounts),” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.

Senior citizens

The report pitched for a separate provision for senior citizens. This revision in DICGC coverage becomes all the more desirable in the Indian context, where senior citizens / retired people have no social security in place and mostly keep fixed deposits for earning interest income.

Apart from this, Ghosh also suggested that depositors should get an incentive to spare a part of their total deposits to buy bank bonds that provide guaranteed coupon rates on a half-yearly basis and are tax-free.

This will herald a new paradigm in the Indian deposit banking sphere, since tax-free and guaranteed payments of a certain income will do much to encourage depositors to come forward with offers to provide a part of their savings in exchange for the shares in the banks.

Published on November 19, 2019

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