Why insure deposits of public sector banks?

“Public money is extremely safe in public sector banks,” declared the Finance Minister Piyush Goyal at a press conference following a meeting with the heads of public sector banks recently. He also said that the government stands fully behind public sector banks and the deposits in PSBs are 100 per cent safe.

This is a timely statement from the Finance Minister when 19 PSBs have declared net loss for the year ended March 31, 2018. Only two banks could declare net profit during this period. Though people are aware that the government is there to rescue PSBs, this reassurance is required as all sorts of rumours are being floated by vested interests.

Yes, PSBs are safe as the government can pump in any amount from taxpayers’ money. The minister’s confidence obviously does not arise from the insurance coverage alone available for bank deposits. It must be based on the government ownership and the fact that it can pump in taxpayer money. Deposit insurance does not cover 100 per cent value of all the deposits. However, the same comfort level cannot be there for private sector and cooperative banks. This is the time for the government to review the need and working of Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly owned subsidiary of Reserve Bank of India, in operation since 1962.

The Corporation insures all bank deposits, such as savings, fixed, current, and recurring. There are some exceptions like deposits of foreign governments, deposits of Central/ State Governments, deposits of State Land Development Banks with State co-operative banks, and inter-bank deposits.

At present, the insurance limit for bank deposit is ₹1 lakh and the premium rate is ₹0.10 per ₹100.

For the year 2016-17, the extent of insurance coverage was for 1,885 million accounts ( 8 per cent of the accounts were partly protected and 92 per cent, fully protected) and the total amount of assessable deposits was ₹103.53 lakh crore(amount of protected deposits 30 per cent and f unprotected deposits, 70 per cent).

Originally, the DICGC was providing coverage for small loans as well. In fact, the DICGC was using the premium collected for deposit insurance to settle claims under small loans for many years.

But as no credit institution was participating in any of the credit guarantee scheme administered by the Corporation, the scheme was discontinued in April 2003 and deposit insurance remains the principal function of the Corporation.

The table shows that major chunk of deposit insurance business to DICGC is from public sector banks. The premium income is predominantly from PSBs.

When the major ownership of PSBs is with the government, which has got the capacity to enable banks to repay the deposits, why should the deposits be covered under DICGC’s deposit insurance scheme? DICGC stipulates that only banks should pay the insurance premium and it cannot be collected from depositors. Hence this affects the bottomline of banks.

Who stands to gains

Who is the beneficiary of this scheme? Up to March 31, 2017, a cumulative ₹295.90 crore was paid towards claims in respect of 27 commercial banks since the inception of deposit insurance. All these banks were from the private sector.

The cumulative amount of claims paid/provided for in respect of 336 co-operative banks since inception amounted to ₹4,738.77 crore. During 2016-17, claims from nine banks were settled to the tune of ₹58.63 crore and these were cooperative banks from different States. Again, DICGC’s balance sheet (2016-17) contains a provision of ₹223.10 crore on account of claims settlement to cooperative banks.

From this it is clear that the insurance premium collected from PSBs is being utilised to settle the claims of cooperative banks. It is a known secret how funds of cooperative banks are misused by politicians across States with immunity.

Making PSBs to have their deposits covered is similar to getting some other guarantee for the currency notes issued by the RBI. When the government can pay all the depositors, there is no need for any deposit insurance for PSBs.

The DICGC should not be allowed to take from PSBs and give to coooperative banks. It is a different matter that the premium rate for all banks is the same without taking into account the difference in risk factor among different banks.

The writer is a retired banker.

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