Recast deposit insurance

It is reported that the government is planning to table amendments to the Deposit Insurance and Credit Guarantee Corporation Act in the Monsoon Session of Parliament. Last year, the government raised the insurance cover on deposits five-fold to ₹5 lakh with a view to provide support to depositors of ailing banks like Punjab and Maharashtra Co-operative Bank.

The deposit insurance scheme has many flaws and over the last 58 years a comprehensive study of the efficacy of the scheme has never been undertaken .

The DICGC hsd, up to March 31, 2020, settled claims to the extent of ₹295.85 crore on account of 27 commercial bank failures. During the same period, it settled claims amounting to ₹5,198.83 crore following the failure of of 357 cooperative banks.

Hence, the amount of claim settled for cooperative banks is 18 times that of commercial banks. Even for the latest financial year of 2019-20, the DICGC settled 100 per cent of the claims on cooperative banks, amounting to ₹80.65 crore.

For decades there have been discussion about charging differential premium based on risk perception. But no decision has been taken so far. The DICGC collects the same premium from all and makes commercial banks compensate for the failure of the cooperative sector.

How the coverage is done

In 2019-20, insurance coverage was provided to 99 commercial banks (including 13 public sector banks), 45 RRBs and a whopping 1,923 cooperative banks. The insured deposit of commercial banks is huge, at ₹30,58,100 crore, whereas it is ₹2,41,000 crore for RRBs and ₹3,96,900 crore for cooperative banks. As RRBs are sponsored mostly by commercial banks, their coverage may be grouped under the latter.

Hence the coverage of insured deposit for commercial banks is more than eight times that of cooperative banks, which implies that the DICGC collects eight times more premium from commercial banks. Over the years, the premium collected from commercial banks have been used to bail out cooperative banks.

Any insurance scheme can be viable only when the number of claims is small compared to the number of units covered. When there are 1,923 cooperative banks with high potential risk, they cannot be combined with a smaller segment of 99 commercial banks with lesser risk. Risk varies based on the type of banks and hence the coverage cannot be uniform.

Look at from another dimension, out of commercial banks’ insured deposits of ₹30,58,100 crore, ₹23,45,900 crore belongs to State Bank of India and other public sector banks. No sovereign government, with majority stake in these banks, can afford to let these banks fail and go intoliquidation.

As per the present arrangement, the DICGC is liable to pay the liquidator the claim amount of each deposit up to ₹5 lakh within two months from the date of receipt of claim list from the liquidator and the liquidator has to disburse the claim amount to each insured depositor.

As this may take a long time, it is better if the amount is paid upfront once moratorium is enforced on a bank and to that extent the proposed amendment will be useful for depositors.

To settle the large amount of claims, the DICGC has to increase the premium suitably; it now charge 12 paisa per ₹100 of assessable deposits.

As per the terms of coverage, the financial burden on account of payment of premium should be borne by the banks themselves and not be passed on to the depositors. However, even when the premium is not recovered from the customers, they pay it indirectly by way of reduced rate of interest on deposits.

It will be better if government banks are exempted from deposit insurance, and the premium is based on the risk perception of individual banks. Also, the depositor should be given the option to decide whether he/she wants insurance coverage or not.

The writer is a retired banker

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